February 1, 2023

Published from Mumbai, Delhi & Bhopal

Microfinance industry to witness disruptions from Covid surge: ICRA

New Delhi,  Covid resurgence is expected to further disrupt the microfinance industry, ratings agency ICRA said.

According to ICRA, risk perception for the microfinance industry remains high as Covid-19 pandemic is still not under control.

“Though some states have classified the microfinance industry as an essential activity, the cash flows of borrowers may be affected due to the restrictions or lockdowns, thereby affecting their repayment ability. Moreover, the risk of infections spreading faster in other regions and increased restrictions/lockdowns in more places persists, which would impact collections.

“While ICRA has noted the relatively stronger balance sheets of most entities in terms of maintaining higher liquidity and lower leverage, the risk of further disruptions in the operations and impact on collections cannot be ruled out,” it said.

According to Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, lockdowns are creating disruptions in the economic activities and impacting the field operations of micro finance institutions (MFIs).

Consequently, the industry is witnessing a reduction in collections and the recovery seen in Q4FY21 is being challenged again.

ICRA estimates a sequential drop of 8-10 per cent in collections in April 2021 and the same may dip further if the infections continue rising and more restrictions are imposed across locations.

The improvement in collection efficiency and pick-up in growth in assets under management (AUM) in H2FY21 helped the industry witness a marginal improvement in the overdue portfolio to 16.7 per cent as on December 31, 2020, which had earlier increased to 18.1 per cent as on September 30, 2020 after the lifting of the moratorium.

“ICRA estimates asset quality pressures for the microfinance industry to continue in the near term amid the rising Covid-19 infections and localised restrictions/ lockdowns,” Sachdeva said.

“Good on-balance sheet liquidity and sizeable provisions created in FY2021 provide cushion for absorbing further shocks. Nevertheless, the severity of the impact would depend on the time taken for the pandemic to subside.”

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