MFIs may face higher credit costs & losses
Microfinance institutions with significant exposure in states of Maharashtra, Madhya Pradesh, Uttar Pradesh, Uttarakhand and Karnataka would witness 5%-10% of December 2016 assets under management as credit costs over FY18-FY19, says a research report from rating agency India Ratings and Research. Ind-Ra says if an MFI with significant exposure to the above states had assets under management of `30 billion as of December 2016, it could experience a loss of `1.5 billion-`3 billion over FY18-FY19. Of this, 50% is likely to be borne over 1QFY182QFY18, leading to PAT losses and capital impairment. In an earlier, report, the rating agency had highlighted that non-recovering portfolio (a part of which may be off books) could result in higher credit costs and capital erosion and thus higher leverage for MFIs in FY18 and partly in FY19. The cumulative collection levels of the affected MFIs on the December 2016 portfolio were 82%-87% of the total demand from November 2016 to June 2017, the study says, adding: “Assuming 10%-15% portfolio growth in 1QFY18, Ind-Ra expects 8%-10% lower credit costs than its earlier assessment, as incremental disbursements would yield operating profits similar to pre-demonetization levels. Midor small-sized MFIs may immediately require capital infusions to stay above the regulatory minimum levels to mitigate the impact of losses in 1QFY18-2QFY18. Some of the larger MFIs raised equity just before demonetization, which may help them to scrape through these assessed credit costs and capital impairment without the need for capital infusion. The losses given default may be only marginal for MFI borrowers that are not intentional defaulters, assuming that the overdue payments come at the end of the loan tenors. Nevertheless, even these accounts may need to be provided for in FY18.”
Ind-Ra says credit costs and capital impairment have been increasingly impacting the sector since 1QFY18 because the regulatory dispensation of 90 days from November 2016 on recognizing NPAs got effectively extended till March 2017 due to financial reporting. In line with the provisioning norms applicable to nonbanking financial companies-MFIs, these companies would have to provide for 50% of the overdue installments in case of loans overdue for 90-180 days and 100% of the overdue installments in case the loans overdue for 180 days or more.