Mumbai: Microfinance institutions (MFIs) along with small finance banks (SFBs) will need around Rs11,000 crore equity funding in financial year 2017-2018 in order to mitigate the impact of demonetization on their asset quality and capital adequacy, according to a report released by credit ratings agency ICRA Ltd.
The report also stated that the total amount of 90 days past due date of MFIs constituted around 45% of their net worth as of 30 June, putting pressure on their capital adequacy.
The ratio of 90 days past due date in relation to net worth was more than 50% for seven out of the 27 entities analysed by ICRA. “Therefore, present leveraging levels, expected credit losses and ability to raise capital will be a critical distinguishing factors for MFIs in the near to medium term," the report stated.
ICRA estimates that MFIs and SFBs together would need external capital (equity) of Rs9,000-11,000 crore for growing at a compounded annual growth rate of 25-30% over the next three years.
Even as MFIs are recovering from the after effects of demonetization, their rate of loan recovery is unlikely to come up to the pre-demonetization levels in the medium term, the rating agency said on Monday.
The report stated that the loan recovery efficiency will not reach 99% and above levels in the medium-term owing to factors like farm loan waivers, political nature of clients, overleveraging MFIs and dilution of discipline. “Ninetynine per cent recovery is unlikely going forward. We expect the number to be within a range of 95-97 per cent," Supreeta Nijjar, vice president at ICRA said. Collection efficiency came down to 82% in December 2016 but improved to 92 per cent by June 2017.
Nijjar said that a total of Rs40,000 crore debt funding will also be needed in order to write off bad loans, that rose sharply due to demonetization and to maintain capital adequacy. As per the agency’s estimate, MFIs will have to write off loans worth Rs3,500 crore approximately during the year.
The return on equity for the sector will also remain negative for the current financial year due to higher credit costs. Nijjar said that demonetization led to the credit cost for MFIs to rise sharply from 1% during the pre-demonetization phase to 5-8% in the current financial year.
ICRA surveyed over 600 MFI centres, covering 19 MFIs and 6,000 borrowers for the study. The agency’s outlook on the sector’s earnings is negative. The report also indicated some amount of ever-greening of loans in the microfinance space.