Domestic rating agency Acuite Ratings announced on Thursday that the collection efficiency of its rated microfinance institutions (MFIs) and smaller non-bank financial firms (NBFCs) dropped to 65 to 85 percent in the first quarter of fiscal 2022.
The agency said in a report that the effects of the second wave of Covid-19 were stronger on collections in the asset classes microfinance and two-wheeled loans compared to the first cycle.
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“An analysis of MFIs and smaller NBFCs rated by Acuit? shows that collection efficiency, which recovered over 90 percent in March 2021, fell to 65-85 percent in the first quarter of fiscal year 22, “it said.
The sector has been experiencing a comeback since the third quarter of 2021 with a significant improvement in payout and collection efficiency.
However, since the second wave of Covid-19 is forcing many states to strict lockdowns, the sectoral recovery has been interrupted and has led to a noticeable deterioration in credit quality, the report said.
The agency’s chief analysis officer Suman Chowdhary said given the intermittent nature of economic activity following the spread of Covid in the first quarter of FY22, borrower income streams, especially those served by smaller NBFCs / MFIs, have been severely impacted.
This has put asset quality stress on these lenders, he said.
“Although collection efficiency improved somewhat in June 2021, defaults will increase in the first quarter of FY21. For smaller MFIs, the 90dpd (days past due) numbers are expected to be in the 4.5-5 range. are percent from June 2021 ?, said Chowdhary.
The report said that in addition to lower recoveries, the borrowing capacity of these smaller players has also been impacted as an estimated 50 percent of players (with a loan portfolio of over Rs.500 billion) have received adequate funding.
Restrictions on raising equity and debt, combined with a sharp decline in securitization volumes due to increased concerns about default, have led to a liquidity bottleneck for smaller players.
The agency said ten out of 13 issuer downgrades by rating agencies in the first quarter of fiscal 22 in the financial sector were smaller MFIs and NBFCs that provide unsecured MSME, personal and vehicle loans.
Of the ten companies that were downgraded in this sector, six were placed in the non-investment category and three of them have defaulted.
Chowdhury said the overall outlook for the MFI and small NBFC sectors will improve over the next few quarters as the economy gradually normalizes, and expects payout growth to rebound in H2FY22.
“However, some of the smaller players with low capital-raising capabilities, higher levels of debt and low liquidity buffers may continue to face credit challenges in the short term,” added Chowdhury.