MFI collection efficiency drops 70% in Q1

With the imposition of lockdowns and restrictions, the collections efficiency (CE) for the Micro Finance Institutions (MFIs) dropped to 65-70 per cent during April to mid-June from 93-95 per cent in March. However, July CE reached to 91-93 per cent which is a positive sign.

As per a report by Equirus, PAR 0+ for its coverage companies increased to 30 per cent in June from 10-15 per cent in March 2021. However, with CE improving in July – PAR 0+ declined by 2-9 per cent (except for Bandhan – which saw delayed lockdowns in key states). The highest improvement in PAR 0+ was for CREDAG from 31 per cent to 22 per cent.

While provisioning was lower than Q4 level, credit cost (annual) for its coverage companies ranged between 3.4 per cent (Equitas) and 13 per cent (Ujjivan). The report has been jointly prepared by Shreepal Doshi, Rohan Mandara and Aakash Bhavsar from Equirus.

The study's analysis indicates that Spandana and Ujjivan has created the highest provisions on AAUM of 14 per cent and 10 per cent respectively, among MFI players owing to the pandemic.

Further, overall restructuring for Spandana (assuming Rs 7.65 bn of portfolio is restructured) and Ujjivan was the highest at 11 per cent and 6.7 per cent respectively.

Talking to Bizz Buzz, Manoj Kumar Nambiar, MD, Arohan, says: "Yes, Q1 was affected for the sector due to the lockdown which continued until mid-May. However, things have started improving since June onwards with activities picking up. Now, the festive season is on and it happens to be the busiest period for MFIs. So, we are quite hopeful that Q2 will be much better than that of Q1.The only issue worrying us is that there should not be wave of the pandemic," said Nambiar, whose term as MFIN chairperson concluded by July.

Within the MFI ecosystem, the analysts prefer CREDAG over others due to presence in economically stronger states and its outperformance in challenging times. For Bandhan, it thinks most negatives (elections, loan waiver announcements, lockdowns) are behind, however remainwatchful of collection trends in key states and execution of Assam MFI loan waiver scheme. Among SFBs, we have been highlighting our preference for Equitas over Ujjivan due to its early transitioning towards a secured book and a sturdy performance on the deposit franchise. Further, management-level rejig and the execution of strategy to move towards secured products remains a key monitorable for Ujjivan. Equirus has a long rating on CREDAG and Equitas and anadd on Bandhan, Ujjivan and Spandana.

Biz momentum for MFI sector turns soft in Q1. July trends encouraging collection efficiency (CE) for its coverage universe (and broader ecosystem) dropped from 93-95 per cent in March to as low as 65-70 per cent for April to Mid-June, adjusting for supportive measures such asrepayment holidays given to customers. However, in Jul'21, CE improved to 91-93 per cent (except for Bandhan, owing to delayed and extended lockdowns in WB and AS) against billing. MFI players tried to sync disbursement trends in line with improving collections as a sign of revival in economic

activity, leading to more credit demand. After a muted quarter on disbursement front, July saw revival of disbursements in tandem with CE improvements. Stress recognition and elevated provisions: During Q1, MFI lenders saw an increase in PAR book across buckets. As of June,PAR 0+ for its MFI coverage universe was hovering around 30 per cent and improved by 2-9 per cent in July (except for Bandhan, which was likely sticky at 30 per cent). The highest improvement in PAR 0+ was for CREDAG from 31 per cent to 22 per cent.

While provisioning was lower than Q4 levels, credit cost (annual) for our coverage companies ranged between 3.4 per cent (Equitas) and 13 per cent (Ujjivan). Our analysis indicates that Spandana and Ujjivan have created the highest provisions on AAUM of 14 per cent and 10 per cent among MFI players owing to the pandemic.

Further, overall restructuring for (assuming Rs 7.65 bn of portfolio is restructured) and Ujjivan was the highest at 11 per cent and 6.7 per cent respectively.

With exposure to a weaker customer profile, MFI lenders saw significant impact of Covid 2.0 on asset quality and business momentum during Q1 FY22.

The study expects FY22 credit cost to be elevated (but lower/equal to FY21, provided there is no third wave). Within the MFI ecosystem, we prefer CREDAG over others due to presence in economically stronger states and its outperformance in challenging times.

For Bandhan, thereport thinks most negatives (elections, loan waiver announcements, lockdowns) are behind, however remain watchful of collection trends in key states and execution of Assam MFI loan waiver scheme. Among SFBs, Equirus has been highlighting its preference for Equitas over Ujjivan due to its early transitioning towards a secured book and a sturdy performance on the deposit franchise.

MFI lenders are conservative in terms of loan growth. Since the outbreak of Covid-19 (broadly since Q1), MFI players have been hit due to their exposure to customers with weaker credit profiles, even as they deployed multiple measures (in line with regulatory guidelines) such as moratorium, restructuring and repayment holidays. Besides, they have seen loan book contraction due to a run-down of loans and been cautious in terms of fresh disbursements.

Further, disbursements have been more focused towards existing customers, new customeracquisition gained traction only in Q4 but slowed down due to COVID 2.0. However, the bounce back of collection efficiency once the lockdown/restrictions have been lifted is a big positive and shows the resilience of the industry.