Stressed assets of non-banking financial companies-microfinance institutions (NBFC-MFIs) — comprising 30+ portfolio at risk (PAR), and loan book under restructuring — are estimated to have declined a significant 800 basis points to nearly 14 percent as of March 2022, after peaking at about 22 percent in September 2021, said CRISIL in a note.
The rating agency added that it still remains well above the pre-pandemic level of 30+ PAR at nearly 3 percent. The reduction in stressed assets, along with improved collection efficiencies mark a recovery in the asset quality of NBFC-MFIs, supported by economic revival, limited impact of the omicron variant, and acclimatisation to the post-pandemic ‘new normal’.
The newly originated book (loans disbursed after July 2021) of NBFC-MFIs has demonstrated a steady performance, with 30+ PAR estimated at just 1-2 percent. Overall monthly collection efficiency was healthy at an average of 97-100 percent in the fourth quarter of last fiscal.
Foreclosures were higher in the last quarter of last fiscal, CRISIL said. That, and the trend in the restructured book needs close monitoring to assess incremental slippages.
“The microfinance sector restructured nearly 10 percent of its loan book under the Resolution Framework 2.0 announced by the Reserve Bank of India (RBI) in the wake of the second Covid-19 wave, compared with a mere 1-2 percent in the first. The extent of this varied between entities from 2 percent to 17 percent and had a strong correlation with the regional impact of the second wave, which had affected the informal economy and rural India more drastically than the first," said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings.
"Collection efficiency of the restructured book, billing for which began in the final quarter of last fiscal, is currently at 60-65 percent. This indicates a higher probability of slippages,” Sitaraman added.
Given the sizeable restructuring and likely slippages — since they cater to the more vulnerable sections of society —most NBFC-MFIs have increased provisioning to fortify their balance sheets against asset quality risks.
CRISIL pointed out that now that the Reserve Bank of India has removed the interest margin cap on lending rates under the new regulatory framework for microfinance loans, they will also have the flexibility to adapt risk-based pricing which can provide headroom to further enhance provisioning buffers if required.
“NBFC-MFIs increased provisions to nearly 6 percent of the loan book as of March 2022 from only nearly 2.5 percent as of March 2020. With the adoption of risk-based pricing, they will likely continue to maintain higher provisions in their attempt to build a more resilient balance sheet,” said Poonam Upadhyay, Director, CRISIL Ratings.
Most NBFC-MFIs rated by CRISIL Ratings are either backed by strong parents with access to capital or have raised fresh equity to maintain adequate capitalisation levels. Going ahead, sustained access to incremental debt and equity funding will be key for the growth prospects of the microfinance sector, said CRISIL.