With restrictions being lifted gradually, collections of microfinance institutions (MFIs), which had plunged to near zero in April due to nationwide lockdown, have rebounded to 70-75 per cent in July.
While the bounce-back has been faster than that envisaged earlier, improving it to the pre-pandemic levels of 98-99 per cent will be an important from an asset quality perspective. To create a buffer for potential pandemic-related credit costs, MFIs are expected to focus on raising additional equity capital over the near to medium term, according to a report by Crisil Ratings.
“The lifting of lockdown-related restrictions and resumption of local economic activity was faster in the rural and semi-urban areas. Consequently, MFIs with greater presence in these areas have reported better collection efficiency. Among States with the largest microfinance presence, Karnataka and Bihar reported better collections because they have managed to control the spread of the afflictions in the rural areas so far,” Krishnan Sitaraman, Senior Director at Crisil Ratings said.
“However, Tamil Nadu and Maharashtra, which were facing the brunt of the pandemic and observing more stringent, localised lockdowns, saw sluggish collections,” he added.
Improvement in recovery from June
Collections had wallowed in single digit through May because of the moratorium granted by MFIs to their borrowers on an opt-out basis but sprung to 55-60 per cent in June and continues to improve. They have been relatively resilient given that only home loans and gold loans, among the major asset classes of non-banking financial companies (NBFCs), have clocked higher collection efficiency.
This is despite MFI borrowers having relatively weaker credit profiles and field-intensive operations involving high personal touch, such as home visits and physical collection of cash. Additionally, disbursements during this period have been negligible.
Given the momentum in collections, and outflows largely limited to operating expenses, liquidity levels have improved over April. Most MFIs received moratorium from banks and hence had low debt repayments, while disbursements were negligible. MFIs have also raised about ₹ 2,000 crore through bond issuances under the targeted long-term repo operations and partial credit guarantee schemes.
The strong recovery in June and July notwithstanding, there is still a significant way to go before reaching pre-pandemic collection levels of 98-99 per cent. With the Covid-19 affliction rate still high and steadily percolating in hinterland, the ability of MFIs to further improve collections will be a key monitorable in the near term.
Intermittent lockdowns and localised restrictions could hamper the collection momentum, too.
“In this milieu, we expect MFIs to focus on raising additional equity over the next few quarters as a buffer against potential credit losses or higher provisioning. In fiscal 2017 and 2018, too, after demonetisation, MFIs (including some which are small finance banks now) raised equity aggregating over ₹4,000 crore,” Poonam Upadhyay, Associate Director at Crisil Ratings said.
“On a risk-adjusted returns basis, the MFI sector is expected to continue to attract interest, especially from specialised investors who focus on financial inclusion,” Upadhyay added.