Financial institutions

Stressed assets of non-banking financial institutions fell to 14% in March 2022: Crisis

Stressed assets of microfinance companies fell to 14% in March 2022


Non-bank financial corporations and microfinance institutions (NBFC-MFIs) distressed assets are estimated to have declined to around 14% in March 2022 from around 22% in September 2021, helped by the recovery of the economy and the limited impact of the omicron variant, says a report.

However, stressed NBFC-MFI assets, which include 30 portfolios at risk (PAR) and loan portfolio restructuring, remain well above the pre-pandemic level of around 3%, Crisil Ratings said in a report released Monday.

“NBFC-MFI distressed assets are estimated to have declined by 800 basis points to around 14% in March 2022, after peaking at around 22% in September 2021,” the report said.

The reduction in stressed assets, along with improved collection efficiency marks a recovery in the quality of NBFC-MFI assets, supported by the economic recovery, the limited impact of the omicron variant and the acclimatization to the post-pandemic “new normal,” he said.

The newly created portfolio (loans disbursed after July 2021) of NBFC MFIs demonstrated stable performance, with 30 PAR estimated at only 1-2%.

Overall monthly collection efficiency was healthy at an average of 97-100% in the fourth quarter last year, the rating agency said.

However, seizures were higher in the last quarter of last fiscal year. That, and the restructured book trend require close monitoring to assess additional slippages, he said.

The agency’s senior director and deputy director of ratings, Krishnan Sitaraman, said the microfinance sector had restructured around 10% of its loan portfolio under the Resolution 2.0 framework announced by the Reserve Bank of India. (RBI) following the second wave of Covid-19, compared to only 1-2% in the first.

The magnitude of this varied between entities from 2% to 17% and had a strong correlation with the regional impact of the second wave, which had affected the informal economy and rural India more drastically than the first, a- he declared.

“The collection efficiency of the restructured book, which began billing in the last quarter of the previous fiscal year, is currently at 60-65%. This indicates a higher likelihood of slippages,” Sitaraman said.

Given the significant restructuring and likely slippages – as they cater to the most vulnerable sections of society – most NBFC MFIs have increased provisioning to strengthen their balance sheets against asset quality risks, said the agency.

Now that the RBI has removed the interest margin cap on lending rates as part of the new regulatory framework for microfinance lending, it will also have the option of adopting risk-based pricing which can provide a room to further improve provisioning reserves if needed, he said.

“MFIs-NBFC increased provisions to nearly 6% of the loan portfolio in March 2022 from just 2.5% in March 2020. With the adoption of risk-based pricing, they will likely continue to maintain higher provisions in their attempt to build a more resilient balance sheet,” said agency director Poonam Upadhyay.