Micro finance companies are running a risk of having cash shortfall of Rs 2,600 crore in the first quarter ending June 2020 (Q1FY21). While their repayments and operational expense obligations are pegged at Rs 8,000 crore in the first quarter, the liquidity buffers on balance sheet are around Rs 5,400 crore, according to rating agency ICRA.

As the collections from borrowers could remain muted for some time post the lockdown is eased, the industry stares at a cumulative cash shortfall. ICRA has analysed a sample of 29 MFIs, which constitute around 70% of the MFI industry on a portfolio basis.

Most of the microfinance institutions (MFIs) have extended a moratorium to their borrowers till May 31, 2020. However, the MFIs are yet to formally receive moratorium from their lenders and the absence of the same could severely impact their ability to serve their debt-servicing obligations.

The strain on MFI borrowers’ cash flows will lead to a build-up of arrears, dilution of credit discipline, migration of borrowers owing to loss of livelihoods and the possibility of local/political issues

The credit costs for MFIs is expected to at least double from the present levels of 1-1.5 per cent to 2.5-3 per cent for most players, which is likely to impact their profitability (RoEs) by 3-5 per cent in FY21.

Meanwhile, rating agency CRISIL has said, the MFI’s may face double whammy as the extension in lockdown period will severely affect their asset quality and will also put pressure on their liquidity profile.

The income generation ability of the borrowers of MFIs will take a hit as the lockdown has been extended and this in turn will impact their repayment thus denting the asset quality of MFIs.

Krishnan Sitaraman, Senior Director, CRISIL Ratings said, “In a scenario where MFIs do not receive moratorium on their bank loans, the liquidity levels they maintain will be an important determinant of their immediate term debt repayment ability”.

There is also the fear that, even after the lockdown ends, it is likely to take time to ramp up collection efficiency to pre-pandemic levels. “Consequently, risk of larger credit losses and their impact on capitalisation metrics will be a key rating sensitivity factor in the road ahead”, CRISIL said.

MFIs have made collection in the month of March and the efficiency was at a healthy level of 98-99 per cent. Moreover, they drew bank loans for on-lending in the last week of March but due to the lockdown, they could not disburse the money so in the near term (next 2-3 months), they have enough liquidity to meet their debt obligation and expenses. But in the medium term, there will be an impact on earning profiles of these lenders, the rating agency said.