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Small finance banks are beginning to feel the heat of localized lockdowns and the advancing pandemic wave, as the virus spreads to India’s small towns and hinterland. However, they are better prepared this time, after last year’s severe setback.

“The disease is spreading much faster, especially in smaller towns. Rural customers are, however, less impacted. There have been some delays in collections for the last few days. Collections have been hit only 1-3% due to the second wave," said Rajeev Yadav, chief executive officer, Fincare Small Finance Bank.

Unlike last year, these banks now have a better collection machinery and tele-calling measures to ensure that the pandemic’s impact is limited.

An executive at a small finance bank said that nearly half of his employees have been infected by the virus, with 150 cases in just March and April, which has slowed down loan recovery.

“Microfinance loans are seeing a small reduction in collection. However, by the end of the month, we expect it to bounce back. Housing loans and car loans to informal salaried customers are also seeing some impact. A strong message has been sent to all micro-enterprise customers this time that they can avail of the prevailing working capital limit for at least two months," said the head of another small finance bank.

The bank had offered an overdraft facility of 10,000 for each micro entrepreneur last year. Of the 350 crore of limit, only 100 crore was utilized as of December, he said.

Last year, the collection efficiency of these banks had plunged during the nationwide lockdown, but since then, they have seen a strong improvement every month.

Almost all small finance banks were faced with increased asset quality pressures on account of covid-19 disruptions, leading to restructuring of some loans and an increase in loans remaining unpaid beyond 90 days, which are categorized as non-performing assets.

According to rating agency ICRA, the microfinance industry is likely to face asset quality pressures in the near term due to the recent surge in infections and localized restrictions.

The majority of microfinance institutions (MFIs) will be able to withstand any stress due to their improving collection efficiency and good on-balance sheet liquidity, the rating agency said in a recent report.

The collection efficiency of the sector improved to around 102% in December 2020, and disbursements also started picking up from Q2FY21 onwards, which is expected to help the microfinance industry achieve growth of 9-11% in its assets under management in FY21, ICRA said.

The improvement in collection efficiency and pick-up in assets under management growth in the second half of 2020-21 have helped the industry witness marginal improvement in the overdue portfolio to 16.7% as on 31 December 2020, which had earlier increased to 18.1% as on 30 September 2020 after the lifting of the moratorium.

However, overdues remain significantly higher than pre-covid levels, the rating agency added.

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