Stressed assets of non-banking financial companies-microfinance institutions (NBFC-MFIs) are estimated to have declined a significant 800 basis points to about 14 per cent as of March 2022, after peaking to about 22 per cent in September 2021, but still above pre-pandemic levels of about 3 per cent, according to Crisil Ratings.
Stressed assets comprise 30 plus days portfolio at risk (PAR), and loan book under restructuring. PAR 30 plus means loan portfolio with 30 days overdue or more divided by total loan portfolio.
The reduction in stressed assets, along with improved collection efficiencies mark a recovery in the asset quality of NBFC-MFIs, supported by economic revival, limited impact of the omicron variant, and acclimatisation to the post-pandemic ‘new normal’, the credit rating agency said in a statement.
Crisil assessed that the newly originated book (loans disbursed after July 2021) of NBFC-MFIs has demonstrated a steady performance, with 30+ PAR estimated at just 1-2 per cent. Overall, monthly collection efficiency was healthy at an average 97-100 per cent in the fourth quarter of last fiscal (FY22).
More foreclosures
However, foreclosures were higher in the last quarter of last fiscal. The trend in the restructured book needs close monitoring to assess incremental slippages, opined the agency.
Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, said the microfinance sector restructured about 10 per cent of its loan book under the Resolution Framework 2.0 announced by the Reserve Bank of India in the wake of the second Covid-19 wave, compared with a mere 1-2 per cent in the first.
The extent of this varied between entities from 2 per cent to 17 per cent and had a strong correlation with the regional impact of the second wave, which had affected the informal economy and rural India more drastically than the first, he added.
“Collection efficiency of the restructured book, billing for which began in the final quarter of last fiscal, is currently at 60-65 per cent. This indicates higher probability of slippages,” said Sitaraman.
The agency observed that given the sizeable restructuring and likely slippages — since they cater to the more vulnerable sections of society — most NBFC-MFIs have increased provisioning to fortify their balance sheets against asset quality risks.
Referring to the RBI removing the interest margin cap on lending rates under the new regulatory framework for microfinance loans, Crisil said NBFC-MFIs will also have the flexibility to adopt risk-based pricing which can provide headroom to further enhance provisioning buffers if required.
Poonam Upadhyay, Director, Crisil Ratings, said that NBFC-MFIs increased provisions to about 6 per cent of the loan book as of March 2022 from only about 2.5 per cent as of March 2020.
With the adoption of risk-based pricing, they will likely continue to maintain higher provisions in their attempt to build a more resilient balance sheet, she added.