Rising credit cost in microfinance sector

India Ratings and Research (Ind-Ra) on Thursday revised upwards its credit cost estimate for the microfinance institution (MFI) sector to 5-10 per cent in the current financial year as compared to an earlier expectation of three-six per cent.

The agency, however, said most of its large-rated MFIs would be able to absorb higher credit costs through their income statement, with minimal impact on equity. After the imposition of stricter measures on mobility across States in the wake of the second wave of Covid-19, the agency in May 2021 had opined that the overall MFI sector's collections could drop by a cumulative 10-15 per cent during the month compared to March 2021.

However, the collection lag in the second half of May 2021 was more severe than the agency's initial estimates, and hence, collections during the month were down by 60-70 per cent for many MFIs. "Accordingly, we have revised the MFI sector's credit cost estimate range for FY22 to 5-10 per cent from three-six per cent, depending on the geographies of operations/ concentration," the agency said in a report.

It believes that larger MFIs with a diverse customer base are better placed to raise funding at competitive costs. Hence, it has reiterated its stable outlook for large and group-owned MFIs and a negative outlook for the rest for FY22. During June 2021, with the lifting of restrictions in the first half of the month in the northern and western States of the country, there was a modest improvement in the collection efficiencies of those regions.

In the southern States, however, the restrictions began to ease slowly only towards the second half of June 2021. It said the restrictions continue to be tighter in Kerala and Tamil Nadu due to slow control over Covid-19 cases. The agency expects south India-based MFIs (including small finance banks) to witness larger shortfalls in collections in the first quarter of FY22 compared to those operating in other regions.