Timely equity infusion aids MFI capitalisation

Timely equity infusion in most micro finance institutions (MFIs) has helped in improvement of their asset quality even as delinquencies pressures continues to persist, according to an ICRA report.

The sector received a capital infusions of Rs 1,500 crore in the first half of FY18 as against Rs 4,700 crore in FY17 indicating continued support for the micro finance institutions and investor confidence in the growth potential of the sector.

"The shock of a sharp and sudden dip in asset quality post-demonetisation has so far been absorbed by equity infusion into most micro finance institutions, the pain is not fully over yet as reflected by the analysis of collection efficiencies, delinquencies, profitability, capitalisation and solvency position during the first of FY18," ICRA said in a report published on Thursday. Given the micro finance institutions' growth targets of 25-35 per cent over the next three years and the expected higher provisioning over the next three-four quarters, the rating agency retains the capital requirement estimates of about Rs 7,000-9,000 crore till FY 2020.

It said the overall collection efficiency in the micro finance sector continued to improve, increasing to 94 per cent in September 2017 from a low of 87 per cent in December 2016, the report said. An encouraging trend is that the improvement was wide spread across almost all affected districts except the Vidarbha region of Maharashtra and in some districts of Madhya Pradesh, it said. Several micro finance institutions reported over 98 per cent collection efficiencies for the loans disbursed after January 2017.

"Consequently, fresh slippage of loans has been arrested," the report said. The rating agency group head (financial sector ratings), Karthik Srinivasan, said increased disbursements in first half have helped in expanding the portfolio and reducing the 0 days past due delinquency (DPD) percentage from the peak of 23.6 per cent in February 2017 to 17.9 per cent as on September 30, 2017.

The report said in the past joint liability group (JLG) mechanism was considered to be a mitigant against the asset quality related concerns for the sector and the group members expressed willingness to repay on each other's behalf in case of default by any member. However, it has been observed that while group guarantee works well in case of temporary cash flow mismatches, in events of prolonged stress situations impacting a large number of borrowers, the members may not be able to honour the group guarantee, the ICRA report added. International credit rating agency Moody’s Investors Service is ICRA’s largest shareholder. ICRA was founded in 1991.