MFIs may face higher credit costs & losses

Banking Frontiers - - Research Notes - Mfis - Mo­han@bank­ingfron­

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.

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