COVID-19 lockdown | NBFC-MFIs stare at liquidity shock: Will RBI step in?

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The COVID-19 lock-down may erode upto 25 percent of the annual collections of NBFC-MFIs, industry fear. This is significant for microlenders since the average loan tenure of NBFC-MFI borrowers is just 18-24 months. For banks, this is much longer. The liquidity vacuum thus created will hit these companies hard. MFIs borrow money at about 10-12 percent from banks and charge about 23 percent interest rate from borrowers. These entities collect payments in cash.

The average loan ticket size of Rs 31,000 crore. There are 54 NBFC-MFIs in the country with about 5.6 crore microfinance borrowers. Indian microlenders have a total loan book of Rs2.16 crore out of which NBFC-MFIs have Rs 73,000 crore. According to the data from the Reserve Bank of India (RBI), outstanding loans to the entire NBFC sector from banks stand at Rs 7 lakh crore. On a year-on-year basis, this exposure has grown by 22 percent. That is a significant exposure.

“This will seriously impact our liquidity position and curtail the ability to issue fresh loans when demand picks up,” said Harsh Shrivastava, chief executive of Microfinance Institutions Network, MFIN to Moneycontrol. “We have stopped collections since all NBFC-MFIs are obliged to offer moratorium for borrowers,” said Shrivasatava.

On March 27, the RBI asked all lending institutions to offer a three-month loan moratorium to borrowers on all term loans. That includes NBFCs. But NBFCs are not permitted to avail the same facility from banks, from whom they borrow money for operations. This lack of level-play put them in a tough spot.

The worsening liquidity position will impact the liquidity position of NBFC-MFIs. These companies mostly dependent on banks and other NBFCs for resources. NBFCs’s ability to extend fresh credit to borrowers will suffer. NBFC-MFIs have four-six months of liquidity cushion to pay salaries and run regular operations. But if the lock-down gets prolonged, this could create problems, Shrivastava said. Microlenders are set to lose about 8-10 percent of their collections every month meaning that three month loan moratorium to borrowers will trim at least 25 percent of the annual collections.

No mercy from banks

The problem is exacerbated for NBFC-MFIs since these entities are being denied a moratorium from banks. An FAQ from Indian Banks Association said that banks would not offer moratorium facilities to financial intermediaries. In other words, NBFC-MFIs have to keep paying their monthly instalments to banks even as they are not getting money from their borrowers. The 54 NBFC-MFIs that are members of MFIN, have drawn around Rs35,000 crore from banks and about Rs 19,000 crore is from other development institutions and other NBFCs.

The lockdown announced in late March to fight COVID-19 spread has hit the industry badly. NBFC-MFIs are also looking at the likelihood of high bad loans as lock-down could result in major income loss of small borrowers. Their borrowers are low-income groups such as cattle farmers, vegetable vendors or small businesses. The targeted long term repo operations of the RBI to the tune of Rs 100,000 crore is not benefitting NBFC-MFIs since large top rated companies are lapping up most of the funds.

“We do not have much benefit from TLTRO. Banks always prefer top rated companies. Very few of us have top ratings and bargaining power unlike big companies,” Shrivastava said. MFIN has written to both the RBI and government to extend the moratorium facility to NBFCs and provide some extra funding channels, Shirvastva said, adding there is no response so far.

Raters caution

On April 15, 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.

"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 would be in place until May 3. The lockdown, having already crossed three weeks, has severely affected people in the low-income category in the society - major customers of MFIs.

In 2010, the Indian microfinance sector plunged into a crisis following a controversial legislation passed by the Andhra Pradesh government. About 35, 000 people lost jobs due to that crisis and a 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.

The problem is not for NBFC-MFIs alone. After the collapse of IL&FS and DHFL, the whole NBFCs sector has faced a tough time to convince their investors and customers to regain the lost trust. The liquidity scenario had turned much worse for these companies for several months, before easing up a bit in recent months. All eyes are on the RBI now.