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15
June 2017
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Demonetisation (The Total Investment & Insurance
Solutions)
Following
demonetisation and political interference, microfinance institutions (MFIs),
including non-banking finance companies (NBFCs) and small finance banks (SFBs)
with exposure to states like Uttar Pradesh, Uttarakhand, Maharashtra and Madhya
Pradesh, faced with asset quality overhang, are staring at significant credit
costs and capital erosion in FY2018, says a research report. The Total Investment & Insurance Solutions
In
a note, India Ratings and Research (Ind-Ra) says, "The current upheaval
has validated our earlier opinion of borrower overleverage and idiosyncratic
and systemic risks (due to political ecosystem) prevalent in the industry.
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."
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Demonetisation (The Total Investment & Insurance
Solutions)
Ind-Ra
says as per its interactions with borrowers, unintentionally defaulting
borrowers are unlikely to clear four or more equated monthly instalments
(EMIs). "...borrower interactions over the last six months indicate that
earning members have lost one-three-month wages or income due to demonetisation
in FY2017. However, business almost recovered in 1QFY2018. The analysis
suggests that incremental incomes of such borrowers in FY18 would be enough to
repay three missed EMIs at best. However, MFIs may need to take haircuts on
borrowers that have missed more than three EMIs or are intentional defaulters.
The extension of loans by three months may work if default is
unintentional." The Total Investment
& Insurance Solutions
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Demonetisation (The Total Investment & Insurance
Solutions)
An
analysis by the Fitch Group Company, indicates that aggregate collection
efficiency of majority of MFIs with significant exposure to affected states on
portfolio outstanding (as of December 2016) was 75%-80% higher in May 2017
compared with a low of 50%-60% in December 2016. "In case collections on
portfolio as on 31 December 2016 do not increase from the current level, MFIs
with significant exposure to affected states and with aggregate loans under
management of Rs1,000 crore and above could incur credit costs and capital
erosion and, thus, higher leverage," the ratings agency says. The Total Investment & Insurance Solutions
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Demonetisation (The Total Investment & Insurance
Solutions)
According
to Ind-Ra, collection pick-up is slower than expectation. Maharashtra was one
of the worst affected states, with monthly collections in some districts being
in single digits, it says, adding, during the revival period after December
2016, the intensity of political interference in affected states was such that
demand for loan waivers did not die down in some districts even after local
elections. The Total Investment & Insurance
Solutions
Ind-Ra's
analysis indicates that in case collections (on portfolio as on 31 December
2016) do not increase from the current level, MFIs with significant exposure to
affected states and with aggregate loans under management of Rs1,000 crore and
above could incur credit costs and capital erosion and, thus, higher leverage.
"At 80%, these MFIs could require equity of Rs100 -Rs300 crore, depending
on loans under management, to ensure their capital levels remain over the
regulatory minimum. The aggregate recovery level on the December 2016 portfolio
should exceed at least 85% by 2QFY2018-3QFY2018 to prevent capital erosion
beyond the regulatory minimum, without additional infusion for some MFIs. At
95% collections on portfolio at end-December 2016, MFIs are likely to witness
marginal capital erosion," it added.
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Demonetisation (The Total Investment & Insurance
Solutions)
According
to the ratings agency, lower-than-worse-case credit costs and equity erosions
are supported by the fact that 15%-20% of assets under management of MFIs are
off-balance-sheet, where credit enhancements, over-collateralisation and first
loss default guarantees could range between 5% and 15% on an aggregate basis. The Total Investment & Insurance Solutions
Ind-Ra
feels that MFI should now look beyond JLG. "We acknowledge that JLG loans
address an important credit need and have an important role in financial
inclusion. However, borrower selection and operating processes need to be
reassessed. Moreover, MFIs need to develop expertise in other secured and
unsecured credit products and roll them out gradually (early experience not
pleasant for most MFIs). Instead of pursuing growth, they need to adopt best
practices of NBFCs, minimise employee churn, and innovate lending and risk
sharing mechanisms," it concluded.The
Total Investment & Insurance Solutions
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