Profitability will be subdued for non-banking finance companies-microfinance institutions (NBFC-MFIs) and small finance banks (SFBs) for this fiscal as credit costs are expected to remain elevated because of persisting uncertainty and expected slippages from the restructured book, rating agency Icra said on Monday.

NBFC-MFIs and SFBs’ profitability performance was subdued in the last fiscal, given the pressure on yields, the impact of excess liquidity on the net interest margins (NIMs) and the increase in credit costs. The pressure was compounded by the second wave of the pandemic and the industry reported a further decline in profitability in the first half of the current financial year, the rating agency said in a release.

On the outlook for the microfinance industry, Sachin Sachdeva, vice president and sector head, Financial Sector Ratings, Icra, said, “Though the industry is expected to witness an improvement in the AUM (assets under management) growth compared to growth in FY21, the operating profitability is expected to remain moderate. Further, the credit costs are expected to remain elevated because of persisting uncertainty and expected slippages from the restructured book. This would keep the profitability subdued for NBFC-MFIs and SFBs in FY22, though the same is likely to witness a significant improvement from FY23.”

In view of the muted performance in the first half of this fiscal, Icra has revised the FY22 growth outlook for the AUM of NBFC-MFIs to 12-14%. “The growth rate in the AUM of NBFC-MFIs is estimated to improve to 18-22% in FY23. There would, however, be downside risk to our estimates in case of significant disruptions caused by the new wave of [Covid-19] infections in Q4FY22 or future waves if any,” Sachdeva said.

The rating agency said the asset quality metrics weakened quite sharply in H1FY22 because of the localised lockdowns imposed by various states/Union territories on account of the second wave, which impacted borrowers’ cash flows and hence the collection efficiency (CE). With the gradual opening of the economy, microfinance activities resumed in Q2FY22 and collections also bounced back to the March 2021 level. Delinquencies had risen significantly in May-June 2021. However, with incremental restructuring and some recovery in collection efficiency, reported delinquencies declined by September 30, 2021, though they remain elevated as compared to March 2021. In addition, NBFC-MFIs (Icra sample) had around 10.7% of their AUM as restructured as on September 30, 2021, the performance of which remains monitorable.

“Notwithstanding the recovery in the CE in Q2FY22, the 90+ days past due (dpd) of NBFC-MFIs (Icra sample) deteriorated to 6.6% as on September 30, 2021, from 5.3% as on March 31, 2021. While regulatory tightening in the form of daily recognition of non-performing advances (NPAs) and upgradation on the full recovery of overdues could impact the reported NPA numbers, we expect the 90+ dpd to decline slightly in H2FY22, though it would remain elevated and would also depend on the impact of the ongoing third wave,” Sachdeva said.