The Indian microfinance industry, a major source of funding for small borrowers, is staring at a major crisis due to the crisis triggered by the coronavirus outbreak.
NBFC-MFIs are in bigger trouble since, under RBI rules, these companies have to give moratorium to borrowers. But, at the same time, NBFCs are not eligible to get moratorium from banks. Thus, it is a double whammy for these firms.
This isn't the first time MFIs are facing a crisis.
In 2010, the Indian microfinance sector had faced a major crisis following a controversial legislation passed by the Andhra Pradesh government. About 35, 000 people lost jobs due to that crisis and significant chunk of money given by banks to MFIs turned bad. The sector never fully recovered from that crisis phase. The RBI had to form a new category of NBFC-MFIs to tighten rules for the sector. If the coronavirus-induced crisis prolongs, these firms may now see a return of the 2010 crisis.
In a note issued on April 15, rating agency Crisil said the extended nationwide lockdown to contain the pandemic has affected the income-generation ability and savings of borrowers of microfinance institutions (MFIs).
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"As for MFIs, normal operations – both loan origination and collections – would remain a challenge since their operations are field-intensive involving high personal touch such as home visits and physical collection of cash,” the rater said.
In a separate report, rating agency Icra also cautioned that credit cost of microfinance institutions could at least double from this point that will , in turn, impact their profitability by 3-5 percent in FY21.
The agency has analysed a sample of 29 MFIs, which constitute around 70 percent of the MFI industry on a portfolio basis. On a collective basis, the sample has total repayment obligations and operational expenditure of around Rs 8,000 crore in Q1 FY2021 against which the on-balance sheet liquidity buffer stood at around Rs 5,400 crore, the agency said.
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"In ICRA's opinion, it will take time for MFI collections to get back to normal as the income levels of most borrowers have been affected. Following the resumption of economic activity, borrowers may tend to prioritise cash for their daily needs and savings over repaying MFIs," the agency said.
ICRA expects the credit costs for MFIs to at least double from the present levels of 1-1.5 percent to 2.5-3 percent for most players, which is likely to impact the profitability (RoEs) of the MFIs by 3-5 percent in FY2021.
"The impact on credit costs could be even higher if there is a permanent loss of livelihood/significant decline in income for a proportion of the borrowers, thereby impacting their repayment capacity," the agency said.
On April 14, Prime Minister, Narendra Modi announced that the nationwide lockdown will be in place until May 3. The lockdown, which has already crossed three weeks, has severely affected people in the low-income category in the society - major customers of MFIs.
Banks not immune
Even banks with significant exposure to MFIs are also fearing erosion in asset quality. Early this month, Brokerage house Ambit Capital in its report on April 8 cut the target price of Bandhan Bank sharply to Rs 65 from Rs 395 cautioning that the asset quality will take a significant hit in FY21 on account of likely deterioration in its microfinance portfolio. Bandhan is one of the banks that has major exposure to the sector.
Ambit expects the lockdown to impact the livelihoods of microcredit consumers, mostly daily-wage earners. The problem is likely to get escalated since the collections of dues are entirely in cash, Ambit said. Also, even after the lockdown is over, there is high political risk looming over the sector.
Politicians may ask borrowers not to repay banks, similar to what happened during the Andhra Pradesh microfinance crisis in 2010 and, again, during the demonetisation programme in 2016, the brokerage said.
Bandhan has about 62 percent of its portfolio concentrated in Eastern India and much of its business is in microcredit. In the event of a substantial rise in bad loans from the segment, Bandhan will be forced to slow down its loan growth. This will lead to compression in net interest margins, even leading to losses in the next two financial years, Ambit said in its report.
Total loan book, as at the end of December, stood at Rs 65,456 crore and gross NPAs at about 2 percent of the overall book. Already, there is some evidence of stress in Bandhan's microloan book.
In Q3, Bandhan made an additional provision of Rs 200 crore on standard advances in microfinance portfolio after evaluating risk observed "in certain areas of a northeastern state".
As of end December-end, on a year-on-year basis, Bandhan's microfinance book grew by 33.4 percent. The total microfinance book stood at Rs 40,100 crore.
In the 12 months to December 2019, the total number of active microfinance borrowers of Bandhan grew 21 percent to 10.5 million. A closer look at Bandhan’s microloan book reveals high concentration in West Bengal, 46 percent of its loan microfinance book. Assam contributes 16 percent.
Besides Bandhan, analysts expect an impact on other banks such as IndusInd Bank with exposure to MFI loans. IndusInd had acquired about Rs 20,000 crore microlending book from Bharat Financial (the earlier SKS Microfinance). The bank has, however, consistently maintained that the portfolio is under control. But not all analysts share this optimism. On April 3, global rating agency Moody's placed IndusInd's domestic and foreign currency issuer ratings of Baa3/P-3 under review for downgrade.
"The review for downgrade of IndusInd's ratings reflects the downside risks to asset quality amid the deteriorating macro environment and financial market volatility. The bank's loan portfolio includes a relatively higher proportion of microfinance and vehicle finance loans than its peers, which are at high risk of being negatively impacted by the economic shock as customers in these segments tend to have limited buffers to withstand economic stress," the agency said.
Facing a difficult scenario, the Microfinance Institutions Network, an industry lobby of MFIs, has written to the government and the RBI seeking assistance in the form of loan moratorium and additional credit facilities. Even though the RBI opened a liquidity channel for banks to lend to companies, only top rated big companies have mainly benefited from this window so far.
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