Microfinance companies fearing a wave of loan defaults have asked the Reserve Bank of India (RBI) to let them extend the tenure of loans in which interest payments were due between 1 November and 31 December.
Microfinance institutions Network (MFIN), a lobby group of microlenders, has written to RBI in this respect, its chief executive officer Ratna Vishwanathan said.
Failure to pay on time will depress the credit rating of borrowers as well as microfinance institutions (MFI).
A microfinance loan is typically for 12-24 months. MFIN wants the tenure to be extended by another three months, essentially restructuring the loan.
“Borrowers have not been able to pay instalments on time due to the disruption caused by discontinuation of high-value notes,” Vishwanathan said. “This has pushed them into the defaulter list in credit bureaus for reasons beyond their control. We have sought this extension to help both the borrower in terms of their credit history on the credit bureau, as well as NBFC (non-banking financial company) MFIs to ensure their rating is not adversely affected. Adverse ratings impact availability and cost of funds,” she said.
At MFIs, a loan is typically classified as an NPA if principal and interest are overdue for 90 days or more. In the wake of the cash crunch due to demonetisation, RBI allowed MFIs an additional 90 days to classify loans as NPAs, if payments were due between 1 November and 31 December. However, some politicians in Uttar Pradesh and Maharashtra misinterpreted this as a loan waiver, and asked many borrowers not to repay MFI loans, putting the industry in a spot.
Despite the 90 extra days, microfinance firms have seen an increase in stress levels. Bharat Financial Inclusion Pvt. Ltd on Monday warned investors that nearly 4.5% of its outstanding loans due for more than 60 days, could slip into the NPA category in the March quarter. In the December quarter, the comparable ratio was 0.2%, according to a note from Religare Institutional Equities.
Ujjivan Financial Services Ltd, meanwhile, made an additional provision of Rs55 crore in the third quarter as a precaution against instalments falling due under the 90-day window.
However, many industry experts believe portfolio at risk (PAR) for most microfinance companies could be as high as 8-10%. According to an MFIN report released in December, 30-day PAR had jumped to 7.52% from under 1% in previous quarters. This was attributed to lower recoveries post-demonetisation.
“One-day PAR gives a clear picture of the magnitude of the problem. In micro finance chances of recovering loans overdue for more than 30 days is very remote. Less than 60 days, chances of recovery is only 10 to 20%. Therefore, I expect NPAs to increase further,” said G. Padmaja Reddy, managing director at Spandana Sphoorthy Finance Ltd.
Once the relaxation is in place, MFIs expects normalcy to return, earliest by June. Collections in parts of Uttar Pradesh, which had fallen by 20-25%, has improved to 75-80%, according to MFIN data.