The second wave of the COVID-19 pandemic impacted the disbursements and collection efficiency (CE) of microfinance institutions (MFIs) in Q1 FY2022 followed by some recovery in Q2 FY2022. Consequently, the industry reported moderation in growth in its assets under management (AUM) and increase in delinquencies in H1 FY2022.
ICRA expects the healthy demand in the industry and increasing level of economic activity to result in a steady growth in disbursements and improvement in CE in H2 FY2022.
Second wave impacts AUM growth
Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, says, “The disruptions caused by the second wave impacted the AUM growth of the industry in H1 FY2022 as the movement of people was greatly hindered and the entities focused on collections instead of disbursements. The pandemic-induced disruptions moderated the portfolio growth to around 5 percent (annualised) in H1 FY2022 as compared to growth of 9 percent in FY2021. Nevertheless, aforementioned favourable factors provide hope for better growth prospects in FY2022 with an estimated growth rate of 12-15 percent.”
Asset qualty weakens sharply
The asset quality metrics weakened quite sharply in H1 FY2022 because of the localised lockdowns imposed by various states/union territories (UTs) on account of the second wave, which impacted the borrowers’ cash flows and hence the CE.
With the gradual opening of the economy, microfinance activities resumed in Q2 FY2022 and collections also bounced back to March 2021 level. Nevertheless, despite the recovery in the CE in Q2 FY2022, overdues increased significantly with the 90+ days past due (dpd) at 6.2 percent as on September 30, 2021 compared to 5.3% as on March 31, 2021.
The delinquencies had risen significantly in May-June 2021, however, with incremental restructuring and some recovery in CE the reported delinquencies declined by September 30, 2021, though the same remain elevated as compared to March 2021 level. In addition, the industry had around 10 percent of its AUM as restructured as on September 30, 2021, performance of which remains monitorable.
Govt measures, RBI boost MFIs
From liquidity perspective, the MFIs have been supported by the various measures undertaken by the Reserve Bank of India (RBI) and the Government of India (GoI) including liquidity enhancement measures and introduction of guarantee schemes for the stressed non-banking financial companies (NBFCs) including MFIs.
Sachdeva said, “Notwithstanding the expected improvement in business during H2 FY2022 the persisting asset quality pressures would keep the credit costs elevated and consequently the profitability subdued in FY2022. Nevertheless, the growth in the AUM in FY2022 is expected to be better compared to FY2021. Further, the ability of MFIs to recover from overdue/restructured accounts would remain monitorable.”
