Covid-19-led disruptions continue to hound MFIs: ICRA

The presence of undrawn sanctioned lines and ramp-up in collections boost the liquidity cover for most of the MFIs, in the absence of which majority would have faced liquidity shortfall. The MFIs’ ability to maintain/further improve the momentum in the collection efficiency and manage the collections from portfolio under moratorium would determine the ultimate credit costs.

Jul 23, 2020 01:07 IST India Infoline News Service

The easing of the lockdown restrictions has enabled domestic microfinance institutions (MFI)s to re-establish their connect and convince a large number of borrowers to start paying their instalments as it will be cost-effective for them. This resulted in better than expected collection efficiency in June 2020 for ICRA’s sample of 21 MFIs, constitution around 70% of the industry (except small finance banks). Based on discussions with industry players, borrowers in the rural areas who are engaged in agricultural, dairy, and allied services have performed better than borrowers from other industries. For most MFIs, especially those with a sizeable presence in rural regions, the collection efficiency has improved to 40-70% in June 2020 compared to a cumulative collection efficiency of less than 10% in April-May 2020. 

The operations of MFIs have been impacted over the last four months following the countrywide lockdown that was imposed to contain the spread of theCovid-19 pandemic. Given the people-centric model followed by the MFIs, concerns on continuity of business operations on the field came to the fore. Further, moratorium announced by the Reserve Bank of India (RBI) on term loans for March-May 2020 period, which was later extended to August 31, 2020 led to negligible collections by MFIs from their borrowers in April-May 2020. On the other hand MFIs faced several delays (and rejections in some cases) in getting approval for a moratorium from their lenders and the uncertainty continues, albeit at lower levels, for the Phase 2 (June 1, 2020 to August 31, 2020).

ICRA’s sample analysis found that the liquidity on the balance sheet of most of the MFIs is not sufficient to meet their debt-servicing obligations and operating expenditure during June-September 2020 period. The MFIs had unencumbered cash/liquid investments of around 11% in relation to their assets under management (AUM) as on May 31, 2020. This metric was around 10% for the similar sample as on March 31, 2020. However, if one were to segregate the MFIs based on the rating category, the ratio for entities in the “BBB” and below rating category was less than half of the ratio for the entities in the ‘A” and above rating category, indicating the stronger on-balance sheet liquidity available for the latter.

Commenting on the situation Mr. Sachin Sachdeva, Vice President – Financial Sector Ratings, ICRA, says, “Out of the ICRA sample of 21 entities, 16 have a balance sheet liquidity cover of less than 1 time for the June-September 2020 period, with the majority (11 entities) being in the “BBB” and below rating category. However, the presence of undrawn sanctioned lines, ramp-up in collections and expectations of a partial moratorium on borrowings result in improvement in the liquidity cover (adjusted) and turns the shortfall into a surplus, except for a few entities. Here too, the entities rated in “A” and above rating category are likely to witness a relatively higher surplus than those rated in the “BBB” and below rating category. The total number of entities with a liquidity cover (adjusted) of less than 1 time during the June-September 2020 period declines to 3, with none of these in the “A” and above rating category. In addition, many of the MFIs rated in “A” and above category have been able to raise funds in June 2020 including funding under the targeted long-term repo operation (TLTRO). This reflects their better refinancing ability. The flow of liquidity to MFIs is expected to improve further as the remaining TLTRO funds are to be invested by the end of July 2020.”

Apart from boosting liquidity, the MFIs are taking steps to improve their operating profits. The MFIs are focusing on rationalising their cost structures by way of rent renegotiation/branch consolidation, salary cuts, incentive reduction and/or retrenchments.  

ICRA is of the opinion that though the initial trends are encouraging, the overall pace of recovery in economic activity and the MFIs’ ability to maintain/further improve the momentum in the collection efficiency would be critical for the industry. “The ability of the MFIs to collect from portfolio under moratorium would determine the ultimate credit costs. However, the credit costs across players would be volatile depending on their rural/urban presence and the extent of livelihood loss witnessed by their respective borrowers,” concludes Mr. Sachdeva

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