“We estimate asset quality pressures for the MFI industry to continue in the near term and the same may get accentuated with the recent increase in Covid-19 infections and localised restrictions/lockdowns,” the agency’s Vice President and Sector Head (financial sector ratings) Sachin Sachdeva said.
The agency noted that even though the near-term outlook for MFIs is clouded given the COVID-19 induced disruptions, the overall long-term growth outlook for the domestic microfinance industry, including MFIs and micro finance-focused small finance banks (SFBs), remains robust.
The collection efficiency (total collections/scheduled demand) of the sector improved to around 102 per cent in December 2020. The disbursements also started picking up from Q2 FY2021 onwards, which is expected to help the MFI industry achieve growth of 9-11 per cent in its assets under management (AUM) in FY2021, it said.
Sachdeva said the improvement in collection efficiency and pickup in growth in AUM in H2 FY2021 has helped the industry witness marginal improvement in the overdue portfolio (0+ days past due (dpd)) to 16.7 per cent as on December 31, 2020, which had earlier increased to 18.1 per cent as on September 30, 2020 after the lifting of the moratorium.
There has been further improvement in Q4 FY2021 as well. However, overdues remain significantly higher than pre-COVID levels, he said. “We estimate the credit costs to rise significantly to 6-7 per cent (spread over two years: FY2021-FY2022) from 1.5 per cent in FY2020,” he said.
The agency’s sample of 20 MFIs indicates that the liquidity flow to the sector has improved over the last few months and overall around Rs 22,900 crore was raised in the first nine months of FY2021. The industry also witnessed reduction in the overall cost of funds during this period. However, despite this, the industry is expected to witness reduction in net interest margins (NIMs), the report said.
“This is owing to reduced interest income with portfolio growth happening only towards H2 FY2021 and negative carry because of excess on-book liquidity,” it said. The report said despite the reduction in cost of funds in the first nine months of FY2021, the operating profitability is expected to decline, which along with rise in credit costs would suppress the return indicators for FY2021.
“Nevertheless, the pick-up in AUM growth in FY2022, along with the increase in provision cover in FY2021, is expected to drive profitability upwards in FY2022, though the same is likely to remain below pre-Covid profitability level,” it added.