MFIs credit costs may be in 3-6% range in FY22, says report

Mumbai: With their collection efficiency getting impacted amid disruptions caused by the second wave of Covid-19 pandemic, microfinance institutions (MFIs) may see their credit cost in the 3-6% range in the current fiscal, a report said.

India Ratings and Research in its report said that collections of microlenders and small finance banks (SFBs) are likely to have declined 3-5% in April 2021 and additional 5 -7% May 2021 (first fortnight of the month), both on a month-on-month basis.

“MFIs could again see credit costs in the range of 3-6% in FY22, if the early trends of the collection performance were to persist,” the agency said.

It said May 2021 could see a higher drop in collections (5-7%) than even April 2021 (cumulative 10-15% drop in collections compared to March 21), as states implement stricter measures to manage the second COVID wave.

The variation among MFIs could be wider, depending on their level of concentration in regions where lifting of restrictions could be slow, it said.

The report further said the incidence of most of the relevant provision will also fall in FY22, given that the bulk of the second wave portfolio deterioration would happen at the beginning of FY22.

“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 expects mid and small MFIs to continue to face challenges in fundraising and/or borrowing costs.
It has reiterated a stable outlook for large MFIs and a negative outlook for the rest for FY22.