Mini-lockdown to affect micro finance collections: Crisil

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Microfinance institutions (MFIs) may face challenges in loan recoveries if more states look at imposing mini-lockdowns like Maharashtra amid a surge in COVID-19 cases, according to a report by Crisil.

“If more states follow Maharashtra and impose mini-lockdowns of their own to curb the pandemic, and these continue for an extended period, portfolio at risk (PAR) recovery would be affected for MFIs,” said a Crisil Ratings report.

Maharashtra is among the top five states in terms of microfinance loans, with assets under management of around Rs 16,700 crore as of December 2020, which amounts to around seven per cent of all microfinance loans. Non-banking finance company micro financiers account for 40 per cent, or Rs 6,700 crore,
of this pie.

The report said that, collection efficiency in Maharashtra was relatively lower at around 85-90 per cent even before the latest curbs because of the previous extended lockdowns. The all-India average collection efficiency was 90-94 per cent in December 2020.

The sector’s collection efficiency has stalled at 90-94 per cent in the past few months compared with the pre-pandemic level of 98-99 per cent. These mini-lockdowns can restrict improvement in the coming months,” said Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings.

However NBFC-MFIs have been allowed to continue operations in Maharashtra unlike the most stringent lockdown phase early last fiscal, which is a big relief as microfinance requires high personal connect, he said.

In terms of asset quality, as of December 2020, the sector’s 30+ PAR stood at around 11 per cent from nearly 2.5 per cent a year back, reflecting the impact on the borrower segment due to the economic challenges faced last fiscal, the agency said.

In Maharashtra, PAR was slightly higher at around 13 per cent. The sector PAR is likely to have improved marginally in the January-March 2021 quarter given the uptick in economic activity.

Nonetheless, it continues to remain high compared to pre-pandemic levels, it said.

The rating agency said the exposure of its rated NBFC-MFIs to Maharashtra ranges from five per cent to 28 per cent of their total loan book and accounts for over 65 per cent of Maharashtra’s MFI asset under management.

Most lenders have already made provisions for 2-5 per cent of their loan books during the nine months ended December 2020. However, the current situation may warrant higher provisioning, it added.

The report further said unlike last fiscal, the disruption in economic activity due to the mini-lockdown is expected to be relatively moderate this fiscal.

Given that many borrowers of MFIs cater to essential services that continue to operate as usual, their cash flows could be curbed to some extent.

While NBFC-MFIs are better prepared to deal with the situation because of their experience with the lockdowns of last year, and by weathering other storms of the past their ability to manage asset quality and maintain healthy collections will bear watching, the report said.

Maharashtra, which is seeing the maximum number of cases, has announced the most stringent restriction- a mini-lockdown through April 30. Many other states have also announced night curfews and weekend lockdowns.      PTI