Sizeable MFI portfolio in orange and green zones could provide some relief to lockdown-hit MFI industry: ICRA

Of the sample set, most entities have more than 50% of their portfolio in the green and orange zones, the turnaround is these areas are expected to be faster and collections higher than the red zone.

May 13, 2020 05:05 IST India Infoline News Service

Post Covid-19 outbreak and the nationwide lockdown of economic activity, the Ministry of Health and Family Welfare, Government of India (GoI) has classified the country into three zones namely green, orange and red (along with containment zones within districts) with varying level of economic activity across the zones. The areas in the green zone have maximum easing of restrictions and are able to start economic activity gradually. This is followed by orange zone and red zone. With the GoI categorisation, 56% of the country’s district will now fall under the green and orange zone with the balance 44% being the red zone.

ICRA did an analysis of 30 microfinance institutions (MFIs) and small finance banks (SFBs), to study their portfolio breakup across zones and the likely impact on the credit costs going forward.   In terms of portfolio distribution of the sample set around 69% of same falls in green and orange zone. Further, of the sample, most of the entities have more than 50% of their portfolio in the green and orange zones. In these areas, the turnaround is expected to be faster and collections higher than the red zone thereby providing some relief to MFIs.

Commenting on the current situation Sachin Sachdeva, Vice President – Financial Sector Ratings, ICRA, says, “Borrowers involved in essential activities such as agricultural and allied activities and dairy/poultry and kirana stores are likely to have been less impacted than the others from a cash flow perspective. The collection efficiency of MFIs therefore, once the lockdown is eased, would be a function of both the borrowers’ cash flows as well as the MFIs’ ability to re-establish a connect with the borrowers.  The impact on entities however, would vary depending on the extent of their exposure to the areas covered under the different zones.”

ICRA note says that entities with a higher share of portfolio in the green and orange zones are likely to witness relatively lower delinquencies than the industry average. Nevertheless, the overall credit costs/eventual loss may be curtailed, provided the entities are able to maintain a better connect with the customers. If one assumes a 150-250 basis point (bps) increase in the credit costs in the green and orange zones and if the increase in the red zone is taken as double of that, the overall credit cost (including write-offs) is expected to increase to 3.5% to 5.0% for FY2021 from around 1.7% in H1 FY2020.

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