Fitch Ratings on Friday said the rising COVID cases may delay recovery in MSME and microfinance lending, and add to asset quality risks of non-banking financial institutions. Fitch estimates India's economic growth this fiscal ending March 2022 to be at 8.4 percent but said that the deteriorating asset quality for Indian NBFIs in 2022 would stem primarily from MSME and MFI sectors, along with property construction finance.

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The Reserve Bank's Financial Stability Report, published in December 2021, noted emerging signs of stress among MSMEs as well as microfinance. Such borrowers generally run on limited cash buffers and capital, and have suffered disproportionately during the pandemic due to their more vulnerable business franchises, the rating agency said.

The surge in COVID-19 cases in India associated with the Omicron variant may delay the recovery in micro, small and medium enterprises (MSMEs) and microfinance lending, adding to asset-quality risks for Indian non-bank financial institutions (NBFIs), Fitch Ratings said in a statement. India added over 2.64 lakh new COVID cases in the last 24 hours. 5,753 cases of the Omicron variant has been detected in the country so far.

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MSME business activities picked up in the second half of 2021, but remain below pre-pandemic levels, but the surge of Omicron cases in January 2022 may disrupt the recovery temporarily. Fitch expects that the scale of disruption associated with the wave will be modest by comparison with India's initial lockdown in 2020 or the Delta variant wave of 2021. Nonetheless, there is likely to be some impact from the Omicron surge as local restrictions are re-introduced. This comes at a time when financial buffers have already been eroded for many small borrowers, it said.

Pressure on MSMEs will also increase as the government's Emergency Credit Line Guarantee Scheme (ECLGS), first launched in May 2020, winds down in the coming months. Most beneficiaries of the scheme have been micro and small businesses, and new disbursements under it will cease by end-June 2022. Any non-performing loans (NPL) under the scheme's various iterations will start showing up as the applicable moratoriums on principal repayments expire over the next one to two years, it said.

Recoveries from MSMEs have been sluggish due to slower collateral liquidation during the pandemic. We expect recoveries of property-backed loans in semi-urban areas will continue to be hampered in 2022 by relatively low liquidity in such real-estate markets.

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For microfinance, further challenges may stem from upcoming elections in five large states, including Uttar Pradesh (UP). Political pressure can often impede loan-recovery actions around election season, and UP is home to a large rural population and microfinance sector. The state accounted for around 8 percent of outstanding microfinance loans in India at end-September 2021, the agency said.

Fitch expects stresses in the MSME and microfinance segments to culminate in higher NPLs, particularly as tightened impairment recognition norms come into effect by March 2022.

First Published:Jan 14, 2022 2:34 PM IST