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MUMBAI: With nine states including Assam and West Bengal heading for elections in FY22, there are expectations that the resultant political risk could be an overhang for the microfinance sector, Indian Ratings and Research said on Tuesday, maintaining a negative outlook on the sector.

It said while large non-banks microfinance institutions (MFIs), or those with assets under management (AUM) of over Rs5,000 crore, have a stable outlook, small to mid non-bank MFIs continue to be on a negative outlook for FY22.

The negative outlook for these entities is also the result of challenges being faced by them in raising funds and managing credit costs that could emerge from urban regions post covid-19, and in Assam and West Bengal-focused MFIs.

“While the collections have picked-up especially in rural areas, they continue to lag in urban regions. Large MFIs have been able to raise funding especially since the second quarter of FY21, aided by easing liquidity and policy measures, while fund raising has been slow for mid and smaller ones with AUM of less than 2,000 crore," it said.

The rating agency said for entities which have significant exposure to urban regions and or to West Bengal and Assam, where the easing of lockdowns has been slow, collections are lower at 80-90% of pre-covid levels. While collection rates have rebounded to 90-95% for others. That apart, it said 2-6% of the clients are such that they are in overdue but paying delayed instalments in partial or full.

It believes that real wage growth has not been high in the past five years and while MFIs’ exposure to a borrower on consolidated basis has not increased significantly in the last couple of years, the average outstanding per unique borrower is high, especially in Assam and West Bengal at Rs50,000-54,000 vs national average of Rs35,000-40,000.

"India Ratings had pointed out the growing indebtedness in West Bengal in its FY17 report ‘Borrower Overleverage Warrants Course Correction’. There are additional seven states that could hold state elections in FY22 and some of these concerns may be amplified," it added.

ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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