Rating agency ICRA on Wednesday said most of the MFIs have extended a moratorium to their borrowers till May 31, but they themselves 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 expects the credit costs for microfinance institutions (MFIs) to be at least double from the present levels of 1-1.5 per cent to 2.5-3 per cent for most players, which is likely to impact the profitability of the MFIs by 3-5 per cent in 2020-21.
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, it said in a statement.
Following the RBI’s decision on moratorium, ICRA said most of the microfinance institutions 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,” it said.
The agency said it has analysed a sample of 29 MFIs, which constitute around 70 per cent 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 first quarter of the fiscal against which the on-balance sheet liquidity buffer stood at around Rs 5,400 crore.
“As the collections from borrowers could remain muted for some time post the lockdown is eased, the industry stares at a cumulative cash shortfall,” it said.
As per estimates, the shortfall for the sample stands at around Rs 2,600 crore in the absence of any external funding support by way of equity/additional debt or extension of moratorium, ICRA said.
As per ICRA’s analysis of the sample, MFIs had unencumbered cash/liquid investments of around 10 per cent in relation to their assets under management as on March 31, 2020, said Supreeta Nijjar, Sector Head and Vice President, Financial Sector Ratings, ICRA.
“However, if one were to segregate the MFIs based on 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,” she 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, it said.
According to the agency, 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 instalments 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 added.
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