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30-day overdue microfinance loans to cross post-demonetization peak: Crisil

Crisil believes that considering the current ground-level challenges, encouraging collections through the digital mode is imperative for MFIs—the way they have transitioned to cashless disbursements. (Rituparna Banerjee/Mint)Premium
Crisil believes that considering the current ground-level challenges, encouraging collections through the digital mode is imperative for MFIs—the way they have transitioned to cashless disbursements. (Rituparna Banerjee/Mint)

  • The rating agency said that a hit to collection efficiency of microfinance institutions owing to protracted covid-19 curbs will increase asset-quality pressures in the sector

MUMBAI : Microfinance loans with repayment delays of over 30 days could rise to 14-16% of the total portfolio in June, higher than 11.7% seen in March 2017, a few months after demonetization, rating agency Crisil said on Friday.

The Indian government had in November 2016 announced withdrawal or demonetization of high-value currency notes of 1,000 and 500.

The rating agency said that a hit to collection efficiency of microfinance institutions (NBFC-MFIs) owing to protracted covid-19 curbs will increase asset-quality pressures in the sector.

But unlike last fiscal, when loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India’s (RBI's) Resolution Framework 2.0, it said.

“The medical impact of the second wave of the pandemic has been much worse than the first wave, and afflictions have percolated to the rural areas, too," said Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings.

Ground-level infrastructural and operational challenges, as well as restrictions on movement of people, he said, have impinged on the microfinance sector’s collection efficiency. Though overall collection efficiency is expected at 75-80% in May, compared with 90-95% in March, pressure on asset quality would be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave, added Sitaraman.

Crisil believes that considering the current ground-level challenges, encouraging collections through the digital mode is imperative for MFIs—the way they have transitioned to cashless disbursements.

With over 30-day delinquencies mounting, the sector is expected to resort to restructuring of loans to a larger extent than last fiscal as this is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket, it said. As a result, demand under restructuring is expected to be in high-single digits compared to 1-2% seen during restructuring 1.0 for the overall sector.

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