India Lockdown Impact: Microfinance Firms Stare At A Cash Shortfall, Says ICRA

Microlenders are facing cash shortages as loan collections have stopped for several weeks amid the lockdown to contain the Covid-19 pandemic, according to ICRA Ltd.

The cash shortfall for 29 microfinance institutions, accounting for 70 percent of the industry's loan portfolio, collectively stands at about Rs 2,600 crore in the absence of any external funding support by way of equity, additional debt or extension of moratorium, the ratings agency said on Wednesday.

These lenders have Rs 8,000 crore worth of repayment obligations and operational expenditure in the first quarter ending June, compared with on-balance liquidity buffer of around Rs 5,400 crore.

“Based on our analysis of the sample, MFIs had unencumbered cash/liquid investments of around 10 percent in relation to their assets under management as on March 31, 2020,” Supreeta Nijjar, vice president and head of financial sector ratings at ICRA. “Of the sample of 29 entities, seven have a liquidity cover (for covering all repayment obligations till April 2020) less than 1 time.”

If the microfinance companies get moratorium from the banks and non-bank lenders, the liquidity cover will be comfortable for April, she said.

In the current environment, access to liquidity will be tough as securitisation of loan portfolios will be limited. Raising equity capital would be delayed as investors are hesitating and would rather wait and watch the performance of the loan book once the lockdown is lifted, according to the ratings agency. This would impact the valuations of microlenders as well as their solvency and liquidity positions in the near term, it said.

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Impact On Asset Quality, Profitability

Microlenders will take time to resume loan repayment collections as most borrowers have been affected by the lockdown and their incomes are constrained, ICRA said. “The strain on borrowers' cash flows will lead to a build-up of arrears, dilution of credit discipline, migration of borrowers owing to loss of livelihoods and the possibility of local/political issue,” it said.

It will be difficult for lenders to recover multiple instalments over the next quarters as most borrowers don't have material income buffers, leading to a rise in defaults, the rating agency said.

This would result in credit costs doubling to 2.5 to 3 percent from the present levels of 1 to 1.5 percent for most players, impacting profitability by around 3 to 5 percent in FY21, says Nijjar.

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“The impact on credit costs could be even higher if there is a permanent loss of livelihood/significant decline in income for a proportion of the borrowers, thereby impacting their repayment capacity.”