Microfinance institutions (MFIs), which offer small loans to the poor and unbanked, are seeking easier provisioning norms as they struggle to recover loans in the aftermath of demonetisation.
Microfinance Institutions Network (MFIN), a self-regulatory body, has approached the Reserve Bank of India (RBI) to relax the provisioning norms on loans that turned bad after demonetisation for three years so that they can meet the minimum capital adequacy requirement (CAR) of 15%, two people aware of the development said on condition of anonymity.
“... we have approached RBI asking for being allowed to stagger provisioning over three financial years so that capital adequacy ratio of institutions does not take a hit," one of the two said.
An RBI spokesperson declined to comment.
Capital adequacy is an indicator of financial strength expressed as the ratio of capital to risk-weighted assets. When an MFI makes a profit, it is ploughed back into the balance sheet, leading to higher CAR. In case there is a loss due to higher provisioning and the loan portfolio continues to increase, CAR starts declining.
According to RBI norms, MFIs need to set aside 50% of a loan that’s overdue between 90 and 180 days to cover the risk of default. For loans that are overdue for more than 180 days, they need to set aside the entire loan amount.
In the aftermath of the November-December demonetisation exercise, local political leaders misled borrowers in some areas of Maharashtra, Uttar Pradesh, Madhya Pradesh and Kerala that their loans had been waived, leading to a sharp drop in loan recoveries.
Industry experts say MFIs could bear 8-10% credit cost on their total loan portfolio in this financial year, hurting their profit margins.
According to an India Ratings report published this month, the aggregate loan collection for the period from November to May ranges between 80% and 98%, depending on the extent of loan concentration in the affected states. Mid- or small-sized MFIs may require immediate capital infusions to stay above the regulatory minimum levels to mitigate the impact of losses in first two quarters of the financial year 2017-18.
“Accounting change do not change the levels of idiosyncratic and systemic risk that they continue to face pertaining to borrower over-leverage, not on-boarding new-to-microfinance borrowers, to geographical expansion, etc.," said Jindal Haria, associate director of financial institutions at India Ratings and Research.
According to Haria, these institutions need to experiment and build capability in individual lending products they can scale up to 15% of their loan portfolios.