MFIs, SFBs to face asset quality issues due to lockdown: India Ratings

Micro finance institutions and small finance banks will find it difficult to carry on the collection work due to the national lockdown on coronavirus pandemic, resulting in serious asset quality issues going forward, rating agency Ind-Ra said on Friday.

It expects microfinance institutions (MFIs) and small finance banks (SFBs) to face severe asset quality issues in the short term, as near-term collections would see unprecedented disruptions on account of the COVID-19 linked nationwide lockdown, it said in a release.

Even as the rated non-banking finance company (NBFC)-MFIs in the investment grade category have adequate liquidity for 1.5-6 months (assuming nil collections and no moratorium), there may be refinancing and funding challenges for some entities in the next 3-6 months, India Ratings and Research(Ind-Ra) said.

"SFBs would face similar risks on the asset side and managing deposits base may also become challenging. However, they would be better placed on the liability side by virtue of them being banks where the Reserve Bank of India is the lender of the last resort.

As a result, Ind-Ra revised its outlook on NBFC-MFIs and SFBs from stable to negative," it noted.

On the asset quality concerns on the NBFC-MFIs driven by the Covid-19 lockdown, it said the micro finance lenders are the hardest hit in the initial period of the lockdown as the field staff cannot go for collections.

"Given that collections mostly happen in cash, they may fall drastically in April 2020 before seeing a modest recovery in May 2020 if the lockdown is lifted. The recovery could be on account of a significant share of the borrowers being involved in providing essential goods and services, so cash flows would not dry up for them. Also, a section of the borrowers would have low debt outstanding as their loans would have run down and they would repay to avail the next cycle of loans," it added.

If MFIs are unable to disburse the next cycle of loans to such customers, this could aggravate the collection issues. This could also be contributed by homogeneity in borrower behaviour, loss of business opportunities and lower demand.

The ratings firm has also cut the GDP growth estimates to 3.6 per cent from 5.5 per cent for the current fiscal year.

On the liquidity front, it said while Ind-Ra rated NBFC-MFIs in the investment grade have sufficient liquidity to cover liability obligations for 1.5-5 months, it could take much longer for the credit support to normalise, considering domestic banks to be the dominant fund supplier to most MFIs and banks may curtail funding/refinancing to MFIs for the short-to-medium term, given the uncertainty towards inflows, if the lockdown is extended.

"Cumulatively, NBFC-MFIs will have to forgo two months collections of around Rs 2,600 crore which is almost equivalent to the cumulative liquidity that they currently hold on the balance sheet. This situation has aggravated, as most of the banks still are uncertain in terms of passing the moratorium benefits to NBFCs.

While the Reserve Bank of India has announced targeted long-term repo-operation 2.0 of Rs 50,000 crore for NBFCs, half of which is targeted for small and mid-sized NBFCs and MFIs, the banks’ appetite to flow the same remains uncertain.