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Covid-19 curbs will increase asset-quality pressures in MFIs: CRISIL

A hit to the collection efficiency of microfinance institutions (NBFC-MFIs) owing to protracted Covid-19 curbs will increase asset-quality pressures in the sector, with loans in arrears for over 30 days likely to cross the surge in the aftermath of demonetisation (DeMon), cautioned CRISIL, a credit rating agency.

Covid-19 curbs will increase asset-quality pressures in MFIs: CRISIL
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Covid-19 curbs will increase asset-quality pressures in MFIs: CRISIL

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Mumbai, Jun 11 A hit to the collection efficiency of microfinance institutions (NBFC-MFIs) owing to protracted Covid-19 curbs will increase asset-quality pressures in the sector, with loans in arrears for over 30 days likely to cross the surge in the aftermath of demonetisation (DeMon), cautioned CRISIL, a credit rating agency.

Of late, the RBI has asked all the banks to keep the CCTV footages of the entire DeMon period preserved with them.

With loans in arrears for over 30 days – or the 30+ portfolio at risk (PAR) mounting, the MFI sector is expected to resort to restructuring of loans to a larger extent than last fiscal as this is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket, the credit rating agency said in a note.

CRISIL assessed that the 30+ PAR could rise to 14-16 per cent of portfolio this month from a recent low of 6-7 per cent in March. This number had surged to 11.7 per cent in March 2017, in the aftermath of demonetisation.

"But unlike last fiscal, when loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India (RBI)'s Resolution Framework 2.0 announced last month, and continue with higher provisioning," it said.

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, said that ground-level infrastructural and operational challenges, as well as restrictions on movement of people, have impinged on the MFI sector's collection efficiency.

"Though overall collection efficiency is expected at 75-80 per cent in May, compared to 90-95 per cent in March, pressure on asset quality would be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave," he said.

Earlier, while addressing a webinar of Enqube Collaborations, he had said that lenders are better prepared to tackle increased NPAs by use of LPC

"Here L stands for maintaining higher liquidity on the balance sheet despite the negative carry it entails. P stands for having higher provisioning cover and C stands for higher capitalization and lower leverage. Use of the LPC framework is helping banks and NBFCs to fortify their balance sheet and enhance their resilience to the impact of the pandemic," he had said.

Kumud Das
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