MFIs face multiple challenges
ICRA expects the securitisation volumes for NBFC-MFIs to be impacted significantly in FY2021 due to Covid-19 outbreak.
The spread of the disease is impacting the:
1) operational activities involved in executing transactions during Q1 FY2021;
2) availability of securitisable loans in originators’ books caused by substantially lower incremental disbursements in March 2020 and Q1 FY2021 (since the originators prime focus would be on recoveries rather than growing their book);
3) investors’ interest towards the loans which were under moratorium and their cautious view on the high risk MFI sector as a whole, and
4) portfolio growth and quality due to growing concerns on credit profiles of MFIs impacting their funding pipeline.
“Microfinance institutions (MFIs) are currently facing multiple challenges pursuant to the spread of the Covid-19 pandemic, given the stretched liquidity, operations in a freeze and significant impact on asset quality likely in the near future,” said Abhishek Dafria, Vice President and Head – Structured Finance Ratings at ICRA in comments on the NBFC-MFIs sector.
Several MFIs are facing liquidity pressures as lenders remain undecided on providing moratorium to them, whereas these MFIs in turn, have already extended a moratorium to their borrowers which would result in negligible collections at least till May 2020.
“MFIs could continue to face challenges in raising funds over the near term as securitisation of their pooled loan assets, which has been a key funding tool in the past two years, could see a rather sharp decline in FY2021, at least in the first half depending upon severity and the longevity of the Covid-19 pandemic,” believes Dafria.
As per data collated by ICRA, NBFC-MFIs raised about Rs.27,000 crore in FY2020 and about Rs.26,400 crore in FY2019 through securitisation which supported their rising disbursement levels and subsequent growth in AUMs (consolidated AUM of NBFC-MFIs grew to Rs.67,320 crore as on 31 December 2019 from Rs.46,589 crore as on 31 December 2018).
The funds raised via securitisation contributed to about 42% of the total disbursements made by the NBFC-MFIs in FY2020 as against 37% in FY2019.
“In the event the lockdown continues for a longer period, the resulting economic disruption would have a lasting impact on the livelihood of MFI borrowers,” added Mukund Upadhyay, Assistant Vice President, ICRA,
Given that the borrowers in this sector would have a fragile financial position, their ability to clear multiple overdues is inherently low.
Further with the probable interference of local politicians and likely migration of some of these borrowers to their base location could deteriorate the carefully nurtured credit culture in the sector.
“The asset quality of rural loan portfolio could still be relatively better as compared to urban loan portfolio as majority of the borrowers are engaged in life-essential activities such as agri-allied, diary business etc. which have relatively less disruption in their business cycles,” elaborated Upadhyay.
Further, the Covid-19 related lockdowns are also expected to be eased out sooner in the rural areas compared to the urban ones.
Nonetheless, the improvement in micro loan collections may be seen only over a longer time frame and investors in the securitisation market may not be keen to purchase MFI loan pools until confidence on the collection efficiencies is reestablished.
With this backdrop, securitisation volumes in the MFI sector are expected to pick up only towards the end of Q2 FY2021.
ICRA, however, notes that in the past, the NBFC-MFI sector displayed remarkable resilience despite facing several headwinds (demonetization event, local and political events in some areas, natural calamities such as cyclones, floods and farm debt loan waivers in some geographies).
Thus, the ratings agency is of the view that disbursements in the sector would once again slowly revive, once the lockdown eases and economic activity resumes.
Securitisation will continue to remain a key source of funding for NBFC-MFIs in the long run. fiinews.com
