NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, January 30, 2017

KOLKATA: The microfinance industry is still facing challenges two-and-a-half months into demonetisation, with repayment collection taking a hit in some rural pockets where cash supply is yet to become normal and in parts of Maharashtra and poll-bound Uttar Pradesh, raising the spectre of a deterioration in asset quality.

The Rs 55,000-crore sector may see loan losses in the range of 1-3% of the overall portfolio, Antique Stock Broking said in a research report. Microfinance companies typically report less than 1% non-performance assets.

“A certain degree of overleveraging among borrowers, coupled with the pursuant currency shortage and the impact of demonetisation on borrowers’ earnings, is bound to adversely impact the asset quality of MFIs,” ratings firm said.

Since the announcement of demonetisation on November 8, the proportion of centres with zero collections has declined to 0.8% from 4.2%. While that may sound encouraging, the lenders have frozen disbursement at centres that face with repayment issues, which is likely to weigh on their efforts to grow loan portfolio.

While the central bank’s decision to give an additional 90-day dispensation for NBFC-MFIs for classifying accounts as non-performing would provide a temporary relief in asset classification, ICRA said it would be difficult for micro lenders to recover multiple installments from borrowers in one go.