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9
February 2017
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Demonetisation(The Total Investment & Insurance Solutions)
Post
demonetisation, the profitability of domestic microfinance institutes (MFIs) is
expected to be negatively impacted in the near term. However, as a positive
outcome of the demonetisation, most of the MFIs are further strengthening their
risk management system by checking the overleveraging of borrowers and
disbursing funds on a more prudent basis, says a research report. The Total Investment & Insurance Solutions
In
the note, Credit Analysis and Research Ltd (Care Ratings), says, "In the
near-term, the profitability of the Indian MFI Industry is expected to be
negatively impacted mainly due to reversal of income due to creation of
non-performing asset (NPA), increase in cost-to-income ratio on the back of
lower income as a result of expected decline in loan portfolio per employee,
and increase in provisioning expense due to deterioration in the asset quality.
As a result, the credit profile of the entities with concentrated portfolio
(especially in affected states), high leverage and weak asset liability management
is expected to remain under pressure over the next six to 12 month
period." The Total Investment & Insurance
Solutions
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Demonetisation1(The Total Investment & Insurance Solutions)
According
to the report, the Microfinance Institutions Network (MFIN) is also putting in
place an initiative where all the industry players have voluntarily agreed to
cap the number to three lenders per borrower, as against only two non-banking
finance companies (NBFC)-MFI per borrower but with no cap on other lenders, by
increasing the universe from NBFC-MFIs to cover the entire industry like banks,
small finance banks (SFBs), NBFCs, NBFC-MFIS, Section 8 or Section 25 companies
as defined in the Companies Act. This would help in better management of
overall indebtedness of the borrowers from the industry perspective, Care
Ratings added.
Care
Ratings interacted with a few major MFIs, which felt that collection efficiency
was expected to improve in the month of January 2017 due to improved supply of
new currency, general improvement in economic activity and important role
played by self-regulatory organisation (SRO) in creating awareness among the
borrowers directly or indirectly through bureaucrats and sustained media
engagements.
It
says, "While the industry expects collection efficiency to reach to normal
level by June 2017, continued interference of local influential individuals
with mala fide intention remains a major risk to the sector in the near-term.
However, the collection efficiency is expected to reach to normal levels over
the medium-term period due to increased credit disciple among the borrowers as
a result of presence of credit bureaus." The Total Investment & Insurance Solutions
Demonetisation
has also given a sudden push to the MFI sector to move towards cashless mode of
operation. While Care Ratings says it believes that a good proportion of MFI
transaction would continue to be dependent upon cash mode due to low
penetration of banks/ATM in rural areas, most of the borrowers are at the
bottom of the pyramid, which are dealing only in cash and low proportion of
smartphone users in India, especially women. However, the intention of most of
the MFI’s to shift the business to cashless mode would bring in greater
transparency and enhance the risk management system over the medium-term
perspective, it added.
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| Demonetisation2(The Total Investment & Insurance Solutions) |
To
assess the near-term impact of demonetization on Indian MFIs, Care Ratings
conducted a survey with 32 MFI entities and one SRO (Sa-dhan). The MFI entities
has been categorized as large MFIs (10 with gross loan portfolio-GLP of more
than Rs500 crore), mid-size MFIs (11 with GLP of Rs100-Rs500 crore) and small-size
MFI (11 with GLP lower than Rs100 crore). The participants in the survey
include top-level executives. The combined asset under management (AUM) of the
surveyed participants was estimated to be around Rs34,000 crore, accounting for
roughly 42% of total MFI industry.
Care
Ratings says, a majority of the respondents were of the view that the
demonetisation would have a negative impact on the Indian MFI industry in the
short term, but the magnitude of the impact would not be as severe as witnessed
during the Andhra Pradesh crisis period mainly due to increased regulatory
intervention of Reserve Bank of India (RBI), presence of credit bureaus and
SROs and self-imposition of stricter code of conduct by MFIN on members than
required by RBI. MFIN members account for about 80% of Indian Microfinance
industry.
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| Demonetisation3(The Total Investment & Insurance Solutions) |
Roughly,
88% of the respondents expect collection rate to improve to more than 90% by
March 2017, which indicates a sharp improvement in collection compared to the
level achieved in the past two months at around 80%. Further, all the
participants are of the view that the collection efficiency is expected to
reach to the level of pre-demonetisation period, or around 99% by June 2017, it
added. The Total Investment & Insurance
Solutions
According
to the Survey, roughly 72% of the respondents will avail the relaxation benefit
provided by RBI for asset classification norms by additional period of 90 days
for the loan instalments falling due from 1 November 2016 to 31 December 2016.
Further, almost all the respondents are of the view that the projected growth
of loan portfolio in FY18 has been revised down due to slowdown in disbursement
after demonetisation.
Based
on interaction with major MFI entities, Care Ratings says it believes that the
decline in AUM growth is mainly due to lower disbursement from banks, NBFCs and
financial institutes (FI)’s on the back of cautious stance on the sector, delay
or disruption in equity raising plan of the company due to investors becoming
cautious on the sector and higher focus of the MFI entities to improve
collection efficiency and maintenance of higher liquidity cushion in the
system. The Total Investment & Insurance
Solutions
Around
66% of the respondents are of the view that the demonetization would have
structurally positive impact on the Indian MFI industry over the medium-term as
most of the entities would gradually shift their business from cash mode to
cashless mode, Care Ratings concluded.The
Total Investment & Insurance Solutions
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