Rating agency Icra has expressed concerns over the deterioration in asset quality of non-bank microfinance institutions in the wake of demonetisation.
The agency in a report said an inadequate supply of currency and a disruption in borrowers’ cash flows have led to a sharp decline in collection efficiencies.
The share of overdue loans in a total loan portfolio of around Rs 57,000 crore was less than 1 per cent as on September 30, 2016. But, this has increased to around 19 per cent as on December 31, 2016, Icra said.
Factors such as over-leveraging, shortage of currency and the possibility of the borrowed amount being used for consumption rather than income generation is affecting credit recovery even as the RBI provided a special dispensation in classification of loans of microfinance institutions.
“While the RBI’s additional 90-day dispensation to classify accounts as non-performing will provide a temporary relief in asset classification, Icra believes it would be difficult for microfinance institutions to recover multiple instalments from borrowers together,” Rohit Inamdar, senior vice-president and group head – financial sector ratings – Icra.
“Over-leveraging among borrowers coupled with the shortage of currency and the impact of demonetisation on borrowers’ earnings will adversely impact the asset quality of microfinance institutions,” he added.
“The pace of replenishment of cash supply in the system, the medium- to long-term impact of demonetisation on borrowers and the quality of customer engagement by the microfinance institutions will be the key determinants of asset quality in the future,” the Icra official said.
“Also, the extent of credit costs that microfinance institutions have to incur will depend on its share of affected portfolio, capital structure as well as loss-sharing arrangements,” he added.
Taking into account the expected increase in both credit costs and operating expenses, Icra has revised its profitability projections to sub-10 per cent for 2017-18 from 13-15 per cent estimated earlier.