MFI profitability hit by note ban, says ICRA report

Collection dived to 75-80% in November-December from 99% after demonetisation.

With demonetisation taking a toll on recoveries during November and December, micro finance institutions might report a substantial dip in profit for 2017-18.

The rise in credit and operating costs are expected to bring down return on equity from 13-15 per cent to below 10 per cent for FY18, according to rating agency ICRA.

Collection dived to 75-80 per cent in November-December, from 99 per cent prior to demonetisation of Rs 500 and Rs 1,000 currency notes on November 8.

The Rs 55,000 crore sector (MFIS and non-bank finance companies) had displayed strong asset quality till recently, said ICRA, with the share of overdue loans lower than one per cent as on September 30. That number for MFIs had increased to 19 per cent as on December 31.

In its reporting in September, ICRA had estimated that MFIs would need aggregate capital of Rs 1,600-4,700 crore (40-120 per cent of the existing net worth) to grow 30-35 per cent over the next three years.

While the growth targets might be tempered, credit losses could be higher, which could impact internal capital generation.

While it is a bit early to accurately estimate the likely increase in credit costs, ICRA says the entities which are highly leveraged would be impacted more.

ICRA said there is some link between the districts in the country reporting low collection efficiencies after the demonetisation, with inherent over-leveraging issues in some of the areas and the coming state assembly elections.

Demonetisation has brought into focus certain longstanding concerns the sector has been facing. MFIs are grappling with a high pace of growth, concerns over the quality of growth and over-leveraging of borrowers.

They also face a challenge from potential dilution in the rigour associated with micro lending and the possibility of more loans being used for consumption than for income generation, says ICRA.

Photograph: Reuters.