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7
August 2017
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Microfinance (The Total Investment & Insurance
Solutions)
Following
demonetisation and political interference in the rural credit scenario,
microfinance institutions (MFIs), including non-banking finance companies
(NBFCs) and small finance banks (SFBs), stare at significant credit costs and
capital erosion in FY2018, says a research note.
In
the report, India Ratings and Research (Ind-Ra), says, "The current
upheaval has validated Ind-Ra’s 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." The Total Investment & Insurance Solutions
Ind-Ra’s
analysis of MFIs indicate slower pickup in collection than its expectations. It
found aggregate collection efficiency (CE; collection/billing for that month;
aggregate CE includes CE for the period November 2016-May 2017) of the majority
of MFIs with significant exposure to affected states on portfolio outstanding
as of December 2016 was 75%-80% in May 2017 compared with a low of 50%-60% in
December 2016. Maharashtra was one of the worst affected states, with monthly
collections in some districts in single digits. 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.
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| Microfinance (The Total Investment & Insurance Solutions) |
With
slow pickup in collection, the ratings agency feels that there is a possibility
of erosion in equity for MFIs. It says, "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 require an equity of Rs100 crore to 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 2QFY18-3QFY18 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."
Talking
about defaults, Ind-Ra says, unintentionally defaulting borrower may not clear
four or more EMIs. "Our interactions with borrowers over the last six
months indicate that earning members have lost one-three-month 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
FY2018 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," it added.
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Microfinance (The Total Investment & Insurance
Solutions)
According
to the ratings agency, under the current situation MFIs need to focus more on
idiosyncratic risk mitigation. It says, "MFIs need to go back to basics by
focusing on vintage, quality of penetration (incremental borrowers to be
new-to-microfinance), low ticket sizes, product diversification (one size fits
all approach may not be incrementally fit for its borrowers)." The Total Investment & Insurance Solutions
Ind-Ra
opines that investors in MFIs need to increase their investment horizons to
enable MFIs to develop tested products over one-two loan cycles. Over time, the
regulator may relook at qualifying asset requirements to expand the target
borrower segment for MFIs, it added.
The
demand for JLG loans is expected to continue, Ind-Ra says, adding loan growth
expectations of MFIs and promoters and investors are aggressive than what the
borrower segment can absorb sustainably. "The focus of MFIs on growing
mainly through group loans has led to high competitive intensity and borrower
overleverage levels. MFIs need to change their focus. To mitigate risks in
group loans, MFIs need to pursue smaller ticket sizes and bring new-to
microfinance borrowers, establish vintage, select patient investors with
investment horizons suitable for product experimentation and development, and
enhance operational capabilities and processes," the ratings agency concluded.The Total Investment & Insurance Solutions
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