Given the COVID-19 pandemic, the Reserve Bank of India (RBI) has allowed a moratorium on term loans for March 1, 2020, to May 31, 2020. Following this, most of the microfinance institutions (MFIs) have extended a moratorium to their borrowers till May 31, 2020. However, the MFIs are yet to formally receive moratorium from their lenders and the absence of the same could severely impact their ability to serve their debt-servicing obligations. ICRA has analyzed a sample of 29 MFIs, which constitute around 70% 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 crores in Q1 FY2021 against which the on-balance sheet liquidity buffer stood at around Rs. 5,400 crores. As the collections from borrowers could remain muted for some time post the lockdown is eased, the industry stares at a cumulative cash shortfall. As per estimates, the shortfall for the sample stands at around Rs. 2,600 crores in the absence of any external funding support by way of equity/additional debt or extension of the moratorium.
Commenting on the current situation Ms. Supreeta Nijjar, Sector Head & Vice President – Financial Sector Ratings, ICRA, says, “Based on our analysis of the sample, MFIs had unencumbered cash/liquid investments of around 10% in relation to their assets under management as on March 31, 2020. However, if one were to segregate the MFIs based on the rating category, this ratio for entities rated in the ‘BBB’ rating category was almost half of entities rated in the ‘A’ rating category, indicating stronger on balance sheet liquidity available for ‘A’ rating category entities. Further, out of the sample of 29 entities, 7 entities have a liquidity cover (for covering all repayment obligations till April 2020) less than 1 times, with none of these being in the ‘A’ category. Nevertheless, if MFIs get moratorium from the banks and NBFCs, the liquidity cover for all the entities in the sample will be comfortable for April 2020.”
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 prioritize cash for their daily needs and savings over repaying MFIs. The strain on borrowers’ cash flows will lead to a build-up of arrears, dilution of credit discipline, migration of borrowers owing to loss of livelihoods and the possibility of local/political issues. The ability of these lenders to recover multiple installments from delinquent borrowers would be tested over the next few quarters as a large proportion of the borrowers do not have material income buffers. It would also be important for the MFIs to minimize the operational risks and employee frauds during this period as collections for MFIs continue to be largely in cash.
Adds Ms. Supreeta, “ICRA expects the credit costs for MFIs to at least double from the present levels of 1-1.5% to 2.5-3% for most players, which is likely to impact the profitability (RoEs) of the MFIs by 3-5% 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.”
Further, lenders and investors may adopt a wait-and-watch policy. MFIs ability to securitise portfolios to generate liquidity may also be limited in the interim. Entities currently in the process of raising capital may face some delay as investors may adopt a wait-and-watch strategy and observe the collection efficiency trends post the lockdown and renegotiate valuations, which may impact their solvency and liquidity positions in the near term.
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