FY23 MFI Outlook: Worst is over; likely revival in growth - India Ratings and Research

22 Feb 2022 , 03:04 PM

India Ratings and Research (Ind-Ra) has revised its outlook on the microfinance sector to neutral for FY23 from negative. The agency has also revised the rating outlook on small-mid non-banks microfinance institutions (NBFC-MFIs; including those with over 50% of assets under management (AUM) in microfinance) to Stable for FY23 from Negative, while maintaining large NBFC-MFIs (group-owned entities or AUM > INR50 billion) on a Stable rating Outlook.

Ind-Ra opines that the COVID-19 impact on credit costs has been largely absorbed, there is a likelihood of normalised growth for MFIs, collections especially on post-covid disbursements have recovered and refinance has become relatively easy. Moreover, there are increased viability expectations for small-mid NBFC-MFIs after the implementation of harmonisation guidelines, as entities could revise their lending rates. This could improve pre-provision operating profit (PPOP) margins and provide higher tolerance to withstand credit costs.

Credit Cost Expectation Declines: As collections ramped-up in December 2021 from June 2021, Ind-Ra expects the credit cost for FY23 will be lower than in FY22. The decline would largely be a function of growth, provision coverage and recovery from restructured loans (could be significant for some MFIs); eventual credit costs in FY23 could decline to 1.5%-5% (4-7% in FY22) with median of around 3%, depending on the aforementioned factors; entities with credit costs at higher end would be outliers.

MFIs in states such as Assam, West Bengal, Kerala and specific districts of Maharashtra and Gujarat where there was delayed easing of lockdown restrictions under both covid waves along with other regional issues would see higher slippages, especially those that have provided longer moratoriums.

Growth Could Resume: Ind-Ra expects the MFI sector to grow between 20%-30% yoy in both FY22 and FY23 in comparison to the below 10% AUM growth in the previous two years. Given the yield limitations, the mid and small MFIs have not seen comparable growth. While large and group-owned NBFC-MFIs would continue with their normal disbursement trends and new customer acquisitions as normalisation happens in FY22 and FY23, small- and mid-sized MFIs would ramp-up these activities once the harmonisation guidelines are implemented.

Viability of Small and Medium NBFC-MFIs Set to Improve: Under the current interest rate pricing cap, small and mid NBFC-MFIs have been extremely vulnerable to credit shocks. They are facing the challenges of availability of credit and adverse cost of borrowings even amid declining interest rates. In Ind-Ra’s opinion, one of the key objectives of harmonisation is to address this. Consequently, MFIs may be able to undertake risk-based pricing as well as cost-plus pricing. This would improve the viability of small and medium MFIs, aid them in building both, scale and operating buffers, and increase their credit worthiness in the eyes of lenders.

Funding Access Eases Somewhat: Over the past 15 months, even mid and small MFIs have manged to refinance existing debt compared to the FY17 to 1HFY21 period, supported by government guarantee to banks for on-lending to MFIs. Ind-Ra expects large MFIs to continue to avail financing 4QFY22 onwards, and small MFIs would have it relatively easy once the harmonisation guidelines are implemented. Given the trend in market yields, Ind-Ra expects firmness or a moderate upward bias in MFIs’ borrowing rates. However, transmission of the same to higher lending rates would improve especially for mid- and small-sized MFIs post harmonisation.