Credit rating agency ICRA says COVID-19 will strain the liquidity and asset quality profiles of micro finance institutions (MFI), and impact their ability to pay interest on borrowings.

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ICRA studied a sample size of 29 MFIs accounting for around 70 percent of the segment in terms of portfolio. The rating agency found that these MFIs cumulatively had total repayment obligations and operational expenditure of around Rs 8,000 crore for the June quarter. Against this, their combined on-balance sheet liquidity buffer stood at around Rs 5,400 crore. This means a Rs 2,600 crore shortfall in the absence of any external funding by way of equity, additional debt or extension of moratorium.

Last month, the Reserve Bank of India allowed all financial institutions to extend a moratorium on term loans due between March 1, 2020 to May 31, 2020 to their borrowers.

However, MFIs are yet to formally receive moratorium from their lenders and the absence of the same could severely impact their ability to pay interest on their borrowings, ICRA said.

As a result, ICRA expects the credit costs for MFIs to at least double from the current levels of 1.0-1.5 percent to 2.5-3.0 percent for most players, which is likely to impact the profitability (RoEs) of the MFIs by 3-5 percent in FY2021.

Former Chairman of Securities Exchange Board of India (SEBI) recently told CNBC-TV18 in an interview that RBI’s moratorium announcement may cause more trouble for MFIs because of it being misinterpreted as a waiver.

“This announcement by RBI about moratorium, that announcement perhaps maybe deliberately or don’t know how, in smaller towns, in regional places, that announcement is being understood as if there is a waiver. So there is a waiver on the loans given to the MFI customers. That is very serious situation. If there is a feeling like an agricultural waiver, there will be a loan waiver for MFI customers for three months or whatever period then we have another set of very serious problems”, he said.

The umbrella body for MFIs in India, Sa-Dhan, also raised concerns about the health of the industry in a letter to Prime Minister Narendra Modi, seeking an extension of the loan moratorium benefits to the MFI industry in a bid to help small-ticket borrowers, who could be at the risk of being pushed into extreme hardships.

ICRA believes the strain on MFI borrowers’ cash flows may lead to arrears, weaken credit discipline, cause many to migrate in search of livelihood, cause local political issues- which in turn will impact the financial health of these MFIs.

Supreeta Nijjar, Sector Head & Vice President – Financial Sector Ratings, ICRA, said, “Out of the sample of 29 entities, 7 entities have a liquidity cover (for covering all repayment obligations till April 2020) less than 1 time, with none of these being in the ‘A’ category. Nevertheless, if MFIs get moratorium from the banks and NBFCs, the liquidity cover for all the entities in the sample will be comfortable for April 2020.”

In ICRA’s opinion, it will take time for MFI collections to get back to normal as the income levels of most borrowers have been affected.

Further, it said that lenders and investors may adopt a wait-and-watch policy, and so MFIs ability to securitise portfolios to generate liquidity may also be limited in the interim.