Credit Costs for MFIs to Drop up to 4% on Covid Crisis

Microfinance institutions (MFIs) may see credit costs in the between 3 and 6 per cent range in the current fiscal year as their collection efficiency is hurt by the second wave of the Covid-19 outbreak, according to a report.

Collections of microlenders and small finance banks (SFBs) are projected to have fallen 3-5 per cent in April 2021 and an additional 5 -7 per cent in May 2021 (first fortnight of the month), according to India Ratings and Research.

The agency said, "MFIs could again see credit costs in the range of 3-6 per cent in FY22, if the early trends of the collection performance were to persist,” 

Governments undertake tougher steps to handle the second Covid wave and hence, it is predicted that May 2021 will experience a higher reduction in collections (5-7 per cent) than even April 2021 (cumulative 10-15 per cent decline in collections compared to March 2021). The variation among MFIs could be greater, depending on their concentration in places where restrictions are likely to be lifted slowly, according to the report.

According to the report, the incidence of most relevant provisions will diminish in FY22, as the bulk of the second wave portfolio deterioration would occur in the first half of the year.

"As a consequence, the impact of the credit costs on account of the second wave would be higher in the annual financials for FY22 than FY21 and possibly even the demonetisation crisis,” it said.  During demonetisation, MFIs credit costs were spread over three years as the event occurred at end of the third quarter of FY17 and the regulator provided forbearance for NPA (non-performing assets) recognition, the report said.

The agency anticipates that fundraising and/or borrowing costs will continue to be a difficulty for mid and small MFIs. It has maintained a stable view for major MFIs while predicting a negative outlook for the rest of FY22.