Bad to worse: Microfinance sector NPAs hit ₹50,000 crore at the end of December last year

Kolkata: Non-performing assets in the microfinance sector surged to an all-time high of ₹50,000 crore, or 13% of the gross loans, at the end of December last year, even as the RBI reduced the need for higher capital allocation against risky unsecured assets.

Moreover, the portfolio at risk that may turn NPA rose to 3.2% of the total loans from 1% a year back, reflecting a severe deterioration in overall credit discipline.

“We remain cautious on the microfinance segment. While the slippages may get elevated for another quarter, our customer base is showing early signs of stability which should start reflecting from Q1 onwards,” IndusInd Bank managing director Sumant Kathpalia said in a post-earnings call with analysts. The bank has a sizeable amount of micro loans in its books.

The estimate of bad loans is based on data from credit bureau Crif High Mark, which does not provide the overall NPA figure but calculates the portfolio at risk for different buckets. As per its estimates, the portfolio at risk for 91 days to 180 days was 3.3% as of December 31; for more than 180 days, it was 9.7%. This means, the share of the portfolio which remained unpaid after 90 days of the first due date was 13%. Loans not serviced for more than 90 days are classified as NPAs.

Data Pending
This analysis does not cover institutions that have not reported the data for the last six months.

If data from those entities and from other not-for-profit entities are included, the sectoral NPA would be higher at ₹56,000 crore, or 14% of the total gross loans, people familiar with the matter said.

This is even after a balance sheet cleansing exercise undertaken by several lenders by way of technical writeoffs.

The size of the microfinance business has contracted for the third quarter in a row, which is another reason for elevated NPA ratios. The stress in the sector, due to over lending to the bottom of the pyramid customers in search of high growth, started haunting the lenders from the beginning of this fiscal year.

Microfinance is a model of giving collateral-free loans to low-income households with annual income of less than Rs 3 lakh. Women are the primary beneficiaries of such loans.

Banks with large exposure to unsecured lending such as Bandhan, IDFC First, IndusInd and RBL are facing the higher stress due to overheating of the sector. Bandhan Bank, the microfinance lender turned universal bank, had 7.3% of its Rs 56,120 crore of unsecured loans turning NPA as of December 31. All unsecured loans are, however, not micro loans.

The regulatory move to reduce risk weight on micro loans given for business generation purposes to 75% from 125% earlier is going to free capital for these lenders and help them in expanding business. Banks’ unsecured loans given for consumption will attract 100% risk weight.

Among small finance banks, ESAF and Utkarsh have suffered a net loss in the third quarter as a reflection of the stress in the microfinance sector. Equitas, Jana, Suryoday and Ujjivan have reported a 67%, 18%, 42% and 64% year-on-year fall, respectively, in net profit for the quarter.

According to sources, about 18.3% of these banks’ microfinance loans turned into NPA. This ratio for universal banks was 15.7%

Publicly listed NBFC-MFIs such as Fusion and Spandana have breached financial covenants in respect of their borrowings from banks and other lenders after suffering consecutive quarterly losses due to a surge in NPAs and resultant credit costs.