India Ratings Adjusts Microfinance Sector Outlook to Neutral for FY23 Amid Recovery Signs

India Ratings and Research (Ind-Ra) has adjusted its perspective on the microfinance sector for FY23 to neutral, shifting from a previously negative stance. The agency has also updated the rating outlook for small to mid-sized non-bank microfinance institutions (NBFC-MFIs) to stable from negative. This change applies to those with over 50% of their assets in microfinance. Meanwhile, large NBFC-MFIs, either group-owned or with assets exceeding INR 50 billion, continue to hold a stable rating outlook.

Ind-Ra suggests that the impact of COVID-19 on credit costs has been mostly absorbed. This absorption paves the way for normalised growth in MFIs, with collections, particularly from post-pandemic disbursements, showing recovery. Additionally, refinancing has become more accessible. The introduction of harmonisation guidelines allows small to mid-sized NBFC-MFIs to adjust lending rates, potentially boosting pre-provision operating profit margins and enhancing their ability to manage credit costs.

With collections improving from June to December 2021, Ind-Ra anticipates a reduction in credit costs for FY23 compared to FY22. This decrease is expected due to growth, provision coverage, and recovery from restructured loans. Credit costs could fall between 1.5% and 5% in FY23, down from 4-7% in FY22, with a median around 3%. Entities with higher credit costs would be considered outliers.

In certain regions like Assam, West Bengal, Kerala, and specific areas of Maharashtra and Gujarat, MFIs might face higher slippages. These areas experienced delayed easing of lockdowns during both COVID waves and other regional challenges. Institutions that offered extended moratoriums are particularly at risk.

The outlook for small to mid-sized NBFC-MFIs appears more promising following the implementation of harmonisation guidelines. These guidelines enable entities to revise lending rates, which could improve their financial performance by increasing pre-provision operating profit margins. This improvement provides them with greater resilience against credit costs.

Overall, the microfinance sector is expected to experience normalised growth as the effects of COVID-19 diminish. Collections have recovered significantly post-pandemic, and refinancing options have become more accessible. These factors contribute to a more stable environment for MFIs moving forward.