NBFC-MFI Sector May See More Restructuring of Portfolio: Crisil

A hit to collection efficiency of non-banking finance companies and microfinance institutions (NBFCs-MFIs) owing to protracted Covid-19 curbs will increase asset-quality pressures in the sector, according to Crisil Ratings.

Loans in arrears for over 30 days -- or the 30-plus portfolio at risk (PAR) -- can rise to 14 to 16 per cent of the portfolio this month from a recent low of 6 to 7 per cent in March. The number had surged to 11.7 per cent in March 2017 in the aftermath of demonetisation. But unlike last fiscal, when the loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India (RBI)'s Resolution Framework 2.0 announced last month, and continue with higher provisioning. Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer at Crisil Ratings, said the medical impact of the second wave of the pandemic has been much worse than the first wave and afflictions have percolated to the rural areas too.

Ground-level infrastructural and operational challenges, as well as restrictions on the movement of people, have impinged on the MFI sector's collection efficiency.

"Though overall collection efficiency is expected at 75 to 80 per cent in May compared to 90 to 95 per cent in March, pressure on asset quality will be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave," said Sitaraman. Considering the current ground-level challenges, encouraging collections through the digital mode is imperative for MFIs -- the way they have transitioned to cashless disbursements. With 30+ PAR mounting, the sector is expected to resort to the restructuring of loans to a larger extent than last fiscal as this is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket.

As a result, demand under restructuring 2.0 can be in high-single digits compared to 1 to 2 per cent seen during restructuring 1.0 for the overall sector.Yet the risk of protracted delinquencies eventually leading to credit costs staying elevated remains. For one, borrowers' track record of repayment ability is yet to be established for already restructured portfolios. Two, lack of prudence is also a possibility.Crisil estimates that close to half of the total assets under management of NBFC-MFIs of Rs 80,000 crore as in March were generated from December 2020 onwards.

Given the relatively vulnerable credit profiles of borrowers and the fact that local economic activity is yet to normalise, sustainability of collections -- especially for recent disbursements -- will be the key monitorable in the coming quarters.