India Ratings retains an overall negative outlook for microfinance institutions

The rating agency retained a stable outlook for the large and strong sponsor-backed microfinance institutions, while small and mid-non-bank microfinance institutions, including those with over 50% of assets under management in microfinance, were on a negative outlook rating

Nidhi S Chugh, ETBFSI, September 09, 2021

India Ratings and Research have maintained an overall negative outlook on the microfinance sector for the second half of the current financial year due to liquidity concerns in small and mid-non-bank microfinance institutions, which could lead to a constraint in their disbursements.

The rating agency retained a stable outlook for the large and strong sponsor-backed microfinance institutions, while small and mid-non-bank microfinance institutions, including those with over 50% of assets under management in microfinance, were on a negative outlook rating

Liquidity constraints of small and mid-sized companies could have a larger impact on Kerala and West Bengal, while harmonization guidelines, government-guaranteed loans, mechanism of Assam debt waiver, and equity raised by some of these companies in the second half of the year could support sentiment in the near term. According to the agency, microfinance institutions can be categorized as per their funding access For most large companies, bank funding lines could continue and they may not face immediate liquidity stress. However, small and mid-size companies would need to conserve their liquidity, which could to a lag in their performance.

"The lower-rated (BBB and below category) entities have witnessed a rising trend in an incremental cost of borrowing which is not the case with large entities If they are able to get a

disproportionate share in government guarantee backed loans, it could help them in funding cost," the agency said in its report.

Credit costs microfinance institutions are likely to be in the range of 5%-10% this financial year, depending on their size and scale, access to liquidity, that is the ability to continue to disburse, and geographic concentration, the rating agency said

India Ratings also noted the recovery efforts taken by microfinance institutions. The collection efficiency improved over July August 2021 from June 2021, given that around 70% of the borrowers were in the essential goods and services segments. The current collection efficiency at the end of June lagged behind March levels by 15%-20%, according to the agency

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