ICRA: MFIs' portfolio growth and profitability to revive in FY2023; impact of third wave remains monitorable

7 Feb 2022 , 12:45 PM

ICRA Ratings expects the long-term outlook for non-banking financial companies-microfinance institutions (NBFC-MFIs) to remain robust, driven by the fact that the growth in disbursements is expected to have continued in Q3 FY2022, post revival in Q2 FY2022. The same is likely to be continued going forward, supported by healthy demand in the industry, increasing level of economic activity; and increasing vaccination in the country.

The second wave of the pandemic had hit the industry in Q1 FY2022 and impacted the recovery that was happening post the first wave of the Covid-19 pandemic. Disbursements declined significantly and the growth plunged in Q1 FY2022. Disbursements picked up again in Q2 FY2022, pushing up the growth in the assets under management (AUM) of NBFC-MFIs to around 5% (annualised) in H1 FY2022. Similar situation was also faced by microfinance- small finance banks (SFBs) in FY2021 and H1 FY2022, though the growth rates observed by them in the on-book portfolio was slightly higher than that observed by NBFC-MFIs.

Commenting on the situation, Mr. Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, says, “The disruptions caused by the second wave impacted the AUM growth of the industry in H1 FY2022 as the movement of people was greatly hindered and the entities focused on collections instead of disbursements.

The steady increase in the disbursements in the industry from Q2 FY2022 provide hope for better growth prospects in FY2022, however, in view of the muted performance in H1 FY2022, ICRA has revised the FY2022 growth outlook for the AUM of NBFC-MFIs to 12-14%. The growth rate in the AUM of NBFC-MFIs is estimated to improve to 18-22% in FY2023. There would, however, be downside risk to our estimates in case of significant disruptions caused by the new wave of infections in Q4 FY2022 or future waves if any.”

The asset quality metrics weakened quite sharply in H1 FY2022 because of the localised lockdowns imposed by various states/union territories (UTs) on account of the second wave, which impacted the borrowers’ cash flows and hence the collection efficiency (CE). With the gradual opening of the economy, microfinance activities resumed in Q2 FY2022 and collections also bounced back to March 2021 level. The delinquencies had risen significantly in May-June 2021, however, with incremental restructuring and some recovery in CE the reported delinquencies declined by September 30, 2021, though the same remain elevated as compared to March 2021 level. In addition, NBFC-MFIs (ICRA sample) had around 10.7% of its AUM as restructured as on September 30, 2021, performance of which remains monitorable.

“Notwithstanding the recovery in the CE in Q2 FY2022, the 90+ days past due (dpd) of NBFC-MFIs (ICRA sample) deteriorated to 6.6% as on September 30, 2021 from 5.3% as on March 31, 2021. While regulatory tightening in the form of daily recognition of non-performing advances (NPAs) and upgradation on the full recovery of overdues could impact the reported NPA numbers, we expect the 90+ dpd to decline slightly in H2 FY2022, though it would remain elevated and would also depend on the impact of the ongoing third wave,” adds Mr. Sachdeva.

On the liquidity front, NBFC-MFIs and SFBs continue to maintain a healthy liquidity profile on the back of funding support and the gradual ramp-up of collections in Q2 FY2022. The various measures undertaken by the Reserve Bank of India (RBI) and the Government of India (GoI) including liquidity enhancement measures and introduction of guarantee schemes for the stressed NBFCs including NBFC-MFIs have helped the sector. On-book liquidity, as a percentage of the AUM of NBFC-MFIs and SFBs combined, stood at 19% as on September 30, 2021 (unchanged from March 31, 2021; 15% as on March 31, 2020).

The profitability performance was subdued in FY2021, given the pressure on yields, the impact of excess liquidity on the net interest margins (NIMs) and the increase in credit costs. The pressure was compounded by the second wave and the industry reported a further decline in profitability in H1 FY2022.

On the outlook, Mr. Sachdeva adds, “Though the industry is expected to witness an improvement in the AUM growth compared to growth in FY2021, the operating profitability is expected to remain moderate. Further, the credit costs are expected to remain elevated because of persisting uncertainty and expected slippages from the restructured book. This would keep the profitability subdued for NBFC-MFIs and SFBs in FY2022, though the same is likely to witness a significant improvement from FY2023.”