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India Ratings and Research (Ind-Ra) in its latest report has said that microfinance institutions (MFIs) may see their credit cost in the 3-6 percent range in the current fiscal (FY22), with their collection efficiency getting impacted amid disruptions caused by the second wave of COVID-19 pandemic. It also said that collections of micro lenders and small finance banks (SFBs) are likely to have declined 3-5 percent in April 2021 and additional 5 -7 percent May 2021 (first fortnight of the month), both on a month-on-month basis.

According to the report, May 2021 could see a higher drop in collections (5-7 per cent) than even April 2021 (cumulative 10-15 per cent drop in collections compared to March 21), as states implement stricter measures to manage the second COVID wave. It noted that the variation among MFIs could be wider, depending on their level of concentration in regions where lifting of restrictions could be slow.

The report further said the that incidence of most of the relevant provision will also fall in FY22, given that the bulk of the second wave portfolio deterioration would happen at the beginning of FY22. As a consequence, the impact of the credit costs on account of the second wave would be higher in the annual financials for FY22 than FY21 and possibly even the demonetisation crisis. During demonetisation, MFIs credit costs were spread over three years as the event occurred at end of the third quarter of FY17 and the regulator provided forbearance for NPA (non-performing assets) recognition.