Why small and mid-size MFIs have received an outlook upgrade
India Ratings and Research (Ind-Ra) has revised its outlook on the microfinance sector including small and mid-sized non-banking microfinance institutions (NBFC-MFIs) from negative to neutral for the coming financial year.
Ind-Ra, which is associated with global ratings firm Fitch, also maintained a stable rating for large NBFC-MFIs, or microlenders with assets of more than Rs 5,000 crore.
The rating agency has opined that the impact of Covid-19 on credit costs has been largely absorbed, and there is a likelihood of normalised growth for MFIs. Also, collections, especially on post-Covid disbursements, have recovered and refinance has become relatively easy, it said.
Moreover, there are increased viability expectations for small-mid NBFC-MFIs after the implementation of harmonisation guidelines, as these entities could revise their lending rates. This could improve pre-provision operating profit (PPOP) margins and provide higher tolerance to withstand credit costs, Ind-Ra said.
Meanwhile, as collections ramped up in December 2021 from June 2021, Ind-Ra expects the credit cost for FY23 will be lower than in the current year.
“The decline would largely be a function of growth, provision coverage and recovery from restructured loans (could be significant for some MFIs); eventual credit costs in FY23 could decline to 1.5%-5% (4-7% in FY22) with median of around 3%, depending on the aforementioned factors; entities with credit costs at higher end would be outliers,” it said.
On the flip side, MFIs in states such as Assam, West Bengal, Kerala and specific districts of Maharashtra and Gujarat where there was delayed easing of lockdown restrictions under both Covid-19 waves along with other regional issues could see higher slippages, especially those that have provided longer moratoriums.
But Ind-Ra expects the MFI sector to grow 20%-30% in both FY22 and FY23, compared with the below 10% AUM growth in the previous two years. Given the yield limitations, the mid and small MFIs have not seen comparable growth. While large and group-owned NBFC-MFIs would continue with their normal disbursement trends and new customer acquisitions as normalisation happens in FY22 and FY23, small- and mid-sized MFIs would ramp-up these activities once the harmonisation guidelines are implemented, it noted.
On the positive side, it believes the viability of small and medium NBFC-MFIs, who have been vulnerable to credit shocks, is set to improve. They have been facing the challenges of availability of credit and adverse cost of borrowings even amid declining interest rates.
One of the key objectives of harmonisation is to address this and MFIs may be able to undertake risk-based pricing as well as cost-plus pricing. This would improve the viability of small and medium MFIs, aid them in building both, scale and operating buffers, and increase their credit worthiness in the eyes of lenders, it said.
At the same time, over the past 15 months, even mid and small MFIs have manged to refinance existing debt compared with FY17 to the first half of FY21, supported by government guarantee to banks for on-lending to MFIs. This comes as another plus for such microlenders, Ind-Ra said.
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