India: Microfinance Industry May Require External Capital of Rs 8,500-10,000 Cro...

Nov 2020
India, November, 04 2020 - The country's microfinance sector would require an external capital of Rs 8,500-10,000 crore for growing at a rate of 15-20 per cent per annum over the next three years and to absorb high level of credit costs, says a report.

Rating agency Icra said the credit costs of Microfinance Institutions (MFIs) may increase to 6-7 per cent spread over FY2020-FY2022 from 1.5 per cent in FY2020.

"As per our estimates, the industry would require an external capital of Rs 8,500-10,000 crore (30-35 per cent of the closing net worth as on March 31, 2020) for growing at a rate of 15-20 per cent per annum over the next three years and absorbing these level of credit costs during this period and maintaining prudent capitalisation levels," Icra's Vice President (Financial Sector Ratings) Sachin Sachdeva said.

Most entities had put on hold their plans to raise equity in H1 FY2021 as investors became wary. In the second half of the current fiscal, equity infusion in the industry is expected to remain limited and is likely to flow to large and well-established entities, he said.

The rating agency said the overall collection efficiency (total collections/ scheduled demand unadjusted for moratorium) of the

MFIs gradually improved and stood at around 88 per cent in September 2020 compared with around 2 per cent in April 2020.

The improvement in collection efficiency was driven by easing of the lockdown restrictions and resumption of economic activities which led to gradual improvement in cash flows of several borrowers, it said.

Icra's Vice President and Sector Head (Financial Sector Ratings) Supreeta Nijjar said the collection efficiency was observed to be lower in Punjab and the eastern states such as West Bengal, Odisha, Assam and Bihar, on account of cyclones, floods and local lockdowns or unrest.

Borrowers in rural areas involved in agricultural, dairy and allied services have performed better than those involved in other activities, she said.

As on August 31, 2020, around 12 per cent of the borrowers in the rating agency's sample of 21 entities, with collective Assets Under Management (AUM) of around Rs 54,213 crore, availed a complete moratorium during April-August 2020.

Nijjar said near-term delinquencies are expected to increase to double digits and remain at these levels for a few months as it will be difficult for such borrowers to clear their dues.

"However, the rise in credit costs could be lower at 6-7 per cent (spread over two years FY2021-FY2022) from 1.5 per cent in FY2020. Entities with a higher share of such borrowers may face higher credit costs," she said.

The liquidity flow to the sector has improved over the last few months, as reflected by the rating agency's sample of 25 MFIs, which raised overall around Rs 11,200 crore (20 per cent of their AUM) in the first half of the current fiscal, largely from Nabard, Sidbi and Targeted Long Term Repo Operations (TLTRO) funding by banks, the report said.

With improvement in liquidity position, disbursements started picking up from Q2 FY2021.

"Nevertheless, the growth in the industry's AUM is expected to reduce to around 10 per cent in FY2021 compared to a 24 per cent growth in FY2020," it said.

The rating agency expects a compression in the operating profit of MFIs in the range of 150-200 basis points in the current financial year.


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