MFI 30+ Delinquency To Cross Demonetization Peak: CRISIL

A hit to collection efficiency of microfinance institutions (NBFC-MFIs) owing to protracted Covid-19 curbs will increase asset-quality pressures in the sector, CRISIL has stated.

Loans in arrears for over 30 days - or the 30+ portfolio at risk (PAR) - could rise to 14-16% of portfolio this month from a recent low of 6-7% in March.

The number had surged to 11.7% in March 2017, in the aftermath of demonetisation. But unlike last fiscal, when loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India (RBI)'s Resolution Framework 2.0 announced last month, and continue with higher provisioning.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, "The medical impact of the second wave of the pandemic has been much worse than the first wave, and afflictions have percolated to the rural areas too. Ground-level infrastructural and operational challenges, as well as restrictions on movement of people, have impinged on the MFI sector's collection efficiency. Though overall collection efficiency is expected at 75-80% in May, compared to 90-95% in March, pressure on asset quality would be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave."

Considering the current ground-level challenges, encouraging collections through the digital mode is imperative for MFIs - the way they have transitioned to cashless disbursements.

With 30+ PAR mounting, the sector is expected to resort to restructuring of loans to a larger extent than last fiscal as this is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket. As a result, demand under restructuring 2.0 could be in high-single digits compared to 1-2% seen during restructuring 1.0 for the overall sector.