Rating agency India Ratings & Research has warned that microfinance institutions (MFIs) could face significant credit costs and equity erosion this year, as inherent weaknesses in the microfinance sector, such as excess leverage among borrowers, have been exposed due to demonetisation and political interference in the rural economy.
“Following demonetisation and political interferences, microfinance institutions, including non-banking finance companies (NBFCs) and small finance banks (SFBs), with exposure to states (Uttar Pradesh, Uttarakhand, Maharashtra and Madhya Pradesh) faced with asset quality overhang stare at significant credit costs and capital erosion in FY18,” it said in a report.
“The current upheaval has validated the earlier opinion of borrower overleverage and idiosyncratic and systemic risks (due to political ecosystem) prevalent in the industry,” India Ratings said. Furthermore, borrower discipline, a key ingredient for the smooth functioning of microfinance, has severely deteriorated in certain districts of affected states and may take years to be restored. In addition, MFIs need to structurally look beyond joint liability group (JLG) loans for loan growth and product diversification by building capabilities, it said.
Aggregate collection efficiency of the majority of MFIs (with significant exposure to affected states) on portfolio outstanding as of December 2016 was 75-80 per cent in May 2017 compared with a low of 50-60 per cent in December 2016. “Maharashtra was one of the worst-affected states, with monthly collections in some districts in single digits.” it said.