Stressed assets of non-banking financial companies-microfinance institutions (NBFC-MFIs) - comprising 30+ portfolio at risk (PAR), and loan book under restructuring - are estimated to have declined a significant 800 basis points to ~14% as of March 2022, after peaking to ~22% in September 2021 (refer to Chart 1 in annexure).

Yet, it remains well above the pre-pandemic level of 30+ PAR at ~3%.

The reduction in stressed assets, along with improved collection efficiencies mark a recovery in the asset quality of NBFC-MFIs, supported by economic revival, limited impact of the omicron variant, and acclimatisation to the postpandemic 'new normal'. 

The newly originated book (loans disbursed after July 2021) of NBFC-MFIs has demonstrated a steady performance, with 30+ PAR estimated at just 1-2%. Overall monthly collection efficiency was healthy at an average 97-100% in the fourth quarter of last fiscal (see Chart 2 in annexure).

However, foreclosures were higher in the last quarter of last fiscal. That, and the trend in the restructured book needs close monitoring to assess incremental slippages.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “The microfinance sector restructured ~10% of its loan book under the Resolution Framework 2.0 announced by the Reserve Bank of India (RBI) in the wake of the second Covid-19 wave, compared with a mere 1-2% in the first. The extent of this varied between entities from 2% to 17% and had a strong correlation with the regional impact of the second wave, which had affected the informal economy and rural India more drastically than the first. Collection efficiency of the restructured book, billing for which began in the final quarter of last fiscal, is currently at 60-65%. This indicates higher probability of slippages.”

Given the sizeable restructuring and likely slippages - since they cater to the more vulnerable sections of society - most NBFC-MFIs have increased provisioning to fortify their balance sheets against asset quality risks. Now that the Reserve Bank of India has removed the interest margin cap on lending rates under the new regulatory framework for microfinance loans¹ , they will also have the flexibility to adopt risk-based pricing which can provide headroom to further enhance provisioning buffers if required.

Says Poonam Upadhyay, Director, CRISIL Ratings, "NBFC-MFIs increased provisions to ~6% of the loan book as of March 2022 from only ~2.5% as of March 2020. With the adoption of risk-based pricing, they will likely continue to maintain higher provisions in their attempt to build a more resilient balance sheet."

Most NBFC-MFIs rated by CRISIL Ratings are either backed by strong parents with access to capital or have raised fresh equity to maintain adequate capitalisation levels. Going ahead, sustained access to incremental debt and equity funding will be key for the growth prospects of the microfinance sector.

¹ https://www.crisil.com/en/home/newsroom/press-releases/2022/03/new-micro-lending-norms-to-spur-risk-based-pricing-aidprofitability.html