State-specific lockdowns to hit microfinance institutions

Microfinance institutions will be negativity hit by the imposition of state-specific lockdowns to stem the further spread of COVID-19 pandemic.

Krishnan Sitaraman, senior director and deputy chief ratings officer at Crisil, said the sector’s collection efficiency has stalled at 90 to 94% over the past few months, compared with the pre-pandemic level of 98 to 99%. He highlighted that the mini-lockdowns can restrict improvement in the coming months.

Maharashtra, according to Crisil, is among the top five states in terms of microfinance loans, with assets under management of around Rs 16,700 crores as of December, accounting for 7% of all such loans. The collection efficiency in Maharashtra has been relatively lower at 85 to 90% even before the latest curbs because of previous extended lockdowns and trails the all-India average of 90 to 94% as of December.

“However, unlike last fiscal, the disruption in economic activity due to the mini-lockdown is expected to be relatively moderate this fiscal,” it said. “Given that many borrowers of MFIs cater to essential services that continues to operate as usual, their cash flows could be curbed to some extent.” The ratings firm stated that while non-banking financial company (NBFC)-MFIs are better prepared to deal with the situation because of their prior experience with lockdowns, their ability to manage asset quality and maintain healthy collections will bear watching.

The NBFC-MFIs have been allowed to continue operations in Maharashtra, unlike during the most stringent lockdown phase early last fiscal, which is a big relief as microfinance requires high personal connect. Sitaraman said in Maharashtra, PAR was slightly higher at around 13%. “The sector PAR is likely to have improved marginally in the January – March 2021 quarter given the uptick in economic activity. It continues to remain high compared to pre-pandemic levels.”

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The firm also said that disruption in economic activity due to the mini-lockdown is expected to be relatively moderate this fiscal. “Given that many borrowers of MFIs cater to essential services that continue to operate as usual, their cash flows could be curbed to some extent. While NBFCs-MFIs are better prepared to deal with the situation – because of their experience with the lockdowns of last fiscal, and by weathering other storms of the past – their ability to manage asset quality and maintain healthy collections will bear watching.”