Giving further insights, Ms. Supreeta Nijjar, Vice President and Sector Head, Financial Sector Ratings, ICRA, says, “The collection efficiency was observed to be lower in Punjab and the eastern states such as West Bengal Odisha, Assam and Bihar, on account of cyclones, floods and local lockdowns or unrest. Borrowers in rural areas involved in agricultural, dairy and allied services, have performed better than those involved in other activities. As on August 31, 2020, ~12% of the borrowers in the ICRA sample (21 entities with collective assets under management (AUM) of around Rs. 54,213 crore) availed a complete moratorium during April-August 2020. Consequently, near-term delinquencies (30+dpd) are expected to increase to double digits and remain at these levels for a few months as it will be difficult for such borrowers to clear their dues. However, the rise in credit costs could be lower at 6-7% (spread over two years FY2021-FY2022; 1.5% in FY2020). Entities with a higher share of such borrowers may face higher credit costs.”
The liquidity flow to the sector has improved over the last few months, as reflected by ICRA’s sample of 25 MFIs, which raised overall ~Rs. 11,200 crore (~20% of their AUM) in H1 FY2021, largely from NABARD, SIDBI and targeted long-term repo operations (TLTRO) funding by banks. With improvement in liquidity position, disbursements started picking up from Q2 FY2021. Nevertheless, the growth in the industry’s AUM is expected to reduce to around 10% in FY2021 compared to a 24% growth in FY2020.
Mr. Sachin Sachdeva, Vice President, Financial Sector Ratings, ICRA, says, “As per our estimates, the industry would require an external capital of Rs. 8,500-10,000 crore (30-35% of the closing net worth as on March 31, 2020) for growing at a rate of 15-20% pa over the next three years and absorbing these level of credit costs during this period and maintaining prudent capitalisation levels.” Most entities put on hold their plans to raise equity in H1 FY2021 as investors became wary. In H2 FY2021 too, equity infusion in the industry is expected to remain limited and is likely to flow to large and well-established entities.
In addition, the MFIs are expected to witness a compression in their net interest margins (NIMs) in FY2021 as the pressure on yields is expected to be more than the overall reduction in the cost of funds. The expected reversal of interest income on delinquent accounts by the year-end and lower non-interest income because of the expected reduction in business volumes during the year would further lower the total income. In addition, increased recovery efforts are expected to negate the impact of the expense optimisation efforts and ICRA expects a compression in the operating profit in the range of 150-200 basis points in FY2021. This, coupled with the rise in credit costs, could suppress the profitability indicators for FY2021.
Ms. Nijjar says, “ICRA estimates challenges for the MFI industry to continue in the near term. Nevertheless, good on-balance sheet liquidity and capitalisation should help most entities to withstand the crisis though profitability indicators are expected to remain subdued over the next two years.”