With the
Covid pandemic spreading fast into the hinterland,
small finance banks are feeling the heat.
The second Covid wave is resulting in a delay in collections this month, though banks are much prepared than last time when they were caught unawares by the pandemic.
The impact is more in smaller towns rather than the rural areas which have seen good monsoon. Also, several bank employees are down with Covid, hampering collection efforts.
As per a report by Emkay Global, the first fortnight of April 2021 has been weak in terms of business activity which is down by 20% across various segments due to lower working days and onset of an aggressive second wave of Covid-19 infections. This is expected to fall further with far stricter enforcement of localised lockdowns.
Cautious lenders
According to experts, credit appetite is likely to remain intact but lenders may turn cautious, which could hurt growth in the near term.
The collection efficiencies were improving from August-September onwards on a month-on-month basis across asset classes. However, a year back, the restrictions announced so far are lower in trajectory or intensity. So while there will be an impact on collections and delinquencies, the impact should be lower than what we saw in Q1 of last year.
But if there was a rise in the intensity of cases accompanied by containment measures and restrictions, it could further impact collections.
The spread intensity and duration of the pandemic, how long the lockdown and curbs last and vaccine trajectory will decide the severity of hit to the SFBs.
Microfinance hit
The mainstay of small finance banks, the microfinance loans are likely to face asset quality pressures in the near term due to the recent surge in Covid infections.
However, a majority of microfinance institutions (MFIs) will be able to withstand any stress due to their improving collection efficiency and good on-balance sheet liquidity, Icra Ratings said.
“We estimate asset quality pressures for the MFI industry to continue in the near term and the same may get accentuated with the recent increase in Covid-19 infections and localised restrictions/lockdowns,” the agency’s Vice President and Sector Head (financial sector ratings) Sachin Sachdeva said.
The agency noted that even though the near-term outlook for MFIs is clouded given the Covid induced disruptions, the overall long-term growth outlook for the domestic microfinance industry, including MFIs and micro finance-focused small finance banks (SFBs), remains robust.
The collection efficiency (total collections/scheduled demand) of the sector improved to around 102 per cent in December 2020.
The disbursements also started picking up from Q2 FY2021 onwards, which is expected to help the MFI industry achieve growth of 9-11 per cent in its assets under management (AUM) in FY2021, it said.
Collection efficiency
Sachdeva said the improvement in collection efficiency and pickup in growth in AUM in H2 FY2021 has helped the industry witness marginal improvement in the overdue portfolio (0+ days past due (dpd)) to 16.7 per cent as on December 31, 2020, which had earlier increased to 18.1 per cent as on September 30, 2020 after the lifting of the moratorium.
There has been further improvement in Q4 FY2021 as well. However, overdues remain significantly higher than pre-Covid levels, he said.
“We estimate the credit costs to rise significantly to 6-7 per cent (spread over two years: FY2021-FY2022) from 1.5 per cent in FY2020, he said.
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