Defaults rising in MFI loan book post demonetisation
Moneylife Digital Team 21 March 2017
Post demonetisation, the delinquencies in microfinance institutions (MFI) loan books are rising. Ratings agency ICRA recently downgraded its outlook on two prominent MFIs to negative from stable, mainly due to limited currency supply and disruption in borrower cash flows, which hampered overall the collection efficiency of these lenders.
ICRA downgraded to negative from stable its outlook on Janalakshmi Financial Services Ltd (JFSL), which has a presence in 222 cities across 17 states and two Union Territories. Janalakshmi has asset under management of Rs12,416 crore and had registered a high compound growth of 130% over the past four years. 
"The revision in outlook factors in the adverse impact of demonetisation on JFSL’s asset quality, where overall collections efficiency is affected by the limited currency supply, disruption in borrower cash flows, and political intervention in certain states, namely, Uttar Pradesh, Maharashtra and Madhya Pradesh. The company’s collection efficiency dipped to 78% in January 2017, from about 98% in September 2016. The company’s disbursements were also impacted because of the limited availability of currency; thus, the disbursements moderated to about 55% (November 2016), 31% (December 2016) and 60% (January 2017) of its average disbursements for seven months of FY2017," the ratings agency says.
Similarly, ICRA cut its outlook on Satin Creditcare Network Ltd’s (SCNL) debentures, to negative from stable, citing elevated financial risk profile post demonetisation that reflects in the lender's deteriorating asset quality. In a statement, the ratings agency says, "Collection efficiency in SCNL’s loan portfolio dropped to 78% for the period November 2016 to February 2017 from over 99% (pre-demonetisation). The dip in collection performance was due to limited currency supply, disruption in borrowers’ cash flows and political intervention in certain districts of Uttar Pradesh, Madhya Pradesh and Maharashtra."
However, ICRA found improvement in SCNL's collection efficiency during February. "The collection efficiency in February was at 89.6 per cent. But a significant recovery from overdue loans, especially 60 days past due (dpd) could be protracted due to the marginal borrower profile and the unsecured nature of the microfinance loans."
Earlier in January, the ratings agency had stated that it sees a substantial drop in MFI profits during FY2017-18, mainly due to rise in credit and operating costs and fall in collections. "The Rs55,000 crore sector (MFIs and non-bank finance companies) had displayed strong asset quality till recently," said ICRA, "with the share of overdue loans lower than one per cent as on 30 September 2016. That number for MFIs had increased to 19% as on 31 December 2016."
p venkateswara
7 years ago
people are loosing confidence in banks, now people are slowly holding money & circulating among themselves. due to higher bank charges, shortage of money in ATMs, etc
S Santhanam
7 years ago
Demonetisation is only a ruse to cover the shortcomings of these mFIs and some more. Fundamentaly these mFIs have spent more in technology upgradation as rate of obsolescence is very high. HR related cost has also increased with high rate of attrition of trained staff. Above all, focus of most of the mFIs continues to be in reaching out to more numbers of new clients instead of offering umbrella of services to the loyal and faithful customers. The rate growth of the owners private wealth is much higher than the rate of economic growth of their customers.
Aseem Pant
Replied to S Santhanam comment 7 years ago
Point well taken. But can a stable employee base also imply possible evergreening?
Gurudutt Mundkur
Replied to S Santhanam comment 7 years ago
Mr Santhanam is absolutely right. Any set-back is attributed to demonetisation. Were their not shortcomings before November 8, 2016? All failures are shoved on that Nov 8th announcement. People will soon say it that same announcement that causes the severe heat, lack or rain and poor crops.
Rashmi Gala
7 years ago
In short term the collection efficiency may have gone down. But habits of the borrowers of paying back loans in time does not get deteriorated . And small borrowers have shown tremendous capability of adjusting to digital payments and use of banking channels. So in long run MFI may have to bring down rates but business will go strong.
Free Helpline
Legal Credit