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Inflation | Fresh surge in Covid infections could dampen MFI asset quality outlook: ICRA

Inflation | Fresh surge in Covid infections could dampen MFI asset quality outlook: ICRA

Renewed surge in coronavirus infections in India could further disrupt asset quality scenario for the micro-finance industry, domestic rating agency ICRA said on Thursday. The MFI industry which is already reeling under Covid related disruptions could see credit costs rise to 6-7% from 1.5% in FY2020.

“We estimate asset quality pressures for the MFI industry to continue in the near term and the same may get accentuated with the recent increase in Covid-19 infections and localised lockdowns,” said Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA. “Though,
improving collection efficiency, good on-balance sheet liquidity and capitalisation should help most entities to withstand the stress.”

India reported more than 2 lakh fresh Covid infections on Thursday, with lockdown and weekend curfew announced in various states including Maharashtra and New Delhi. The second wave is likely to dent the sluggish recovery in consumer and corporate confidence.

The onset of lockdown restriction and the moratorium on loan repayments extended to borrowers had led to the industry recording negligible collections in April 2020, but the situation improved gradually over the subsequent months with easing of restrictions and pick-up in economic activity. As a result, the collection efficiency improved to nearly 102% in December 2020.

The improvement in collection efficiency and pickup in AUM growth has helped the industry witness marginal improvement in the overdue portfolio to 16.7% as on December 31, 2020, which had earlier increased to 18.1% as on September 30, 2020 after the lifting of the moratorium.

“There has been further improvement in the March quarter, however, overdues remain significantly higher than pre-Covid levels and hence ICRA estimates the credit costs to rise significantly to 6-7% spread over two years,” Sachdeva added.

ICRA’s sample of 20 MFIs indicates that the liquidity flow to the sector has improved over the last few months and overall Rs. 22,900 crore were raised in the first nine months of the fiscal year gone by.

The industry also witnessed reduction in their overall cost of funds during this period. Despite this reduction, the operating profitability is expected to decline in FY2021, which along with rise in credit costs would suppress the return indicators for FY2021, the agency said.

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