Microfinance industry may require external capital of Rs 8,500-10,000 crore: Icra

Cornelius Chong

27 Nov 2020

India’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.

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.

Thankfully, 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. This was attributed to the easing of the lockdown restrictions and resumption of economic activities which led to gradual improvement in cash flows of borrowers.

However, near-term delinquencies are still expected to increase to double digits and remain at these levels for a few months, as borrowers find difficulties clearing their dues. During these uncertain times, growth in the industry's AUM is expected to be reduced to around 10 per cent in FY2021 compared to a 24 per cent growth in FY2020. Smaller MFIs have been hardest hit, with whatever limited equity infusion flowing to large and well-established entities.

Recommendations

- Enhanced monetary policy support for MFIs, for instance in the form of TLTRO (targeted long-term repo operations)
- Continued access to microfinance services for customers and tailor relief measures to address the distinct challenges of poor people due to the pandemic
- Heightened monitoring of MFIs’ liquidity and portfolio quality amidst the restructuring of loans, to lower the risks of scams and fraud

Conclusion

COVID-19 has impacted borrowers in India adversely, with many finding it difficult to repay back their debt to MFIs. This has in turn affected the liquidity and financial positions of MFIs. MFIs may have to resort to government intervention through fiscal support, as investors look on warily amidst the pessimistic outlook for the microfinance industry.

Original Articles: