Microfinance firms brace for write-offs of Rs 5,000 crore

Debt waiver schemes announced by state governments pull down recovery

The microfinance sector is bracing to write off close to Rs 5,000 crore as bad loans, on account of debt waiver schemes by state governments.

This excludes write-offs by small finance banks-commercial banks and non-MFI non-banking finance companies (NBFCs).

“We estimate the amount of write-offs to be Rs 4,000-5,000 crore. Anyone who has defaulted would not get a fresh loan. In several parts, defaulters have even stopped coming to group meetings, which makes recovery even more difficult,” said Ratna Vishwanathan, chief executive officer, MFIN (Microfinance Institutions Network).

Of the amount stuck as bad loans, the biggest defaults are in Vidarbha district of Maharashtra, around Rs 1,000 crore is estimated to be the amount of defaults, according to informal estimates by MFIN.

Repayment had been severely impacted in western Uttar Pradesh and pockets of Maharashtra. 

In certain pockets, repayments had come down by 20 to 30 per cent to around 70 per cent. From the recovery estimates of around 99 per cent, it now stands at around 90 per cent for the microfinance industry. 

According to data available from MFIN, at the end of the June quarter of 2016-17, for NBFC MFIs the portfolio at risk (PAR) at more than 30 days was still high at 7.46 per cent, against 0.32 per cent in the corresponding quarter in 2016-17.

In June, the Maharashtra government had announced a debt waiver of Rs 34,000 crore for nearly 8.9 million farmers. 

Earlier, the Uttar Pradesh government waived loans worth Rs 36,359 crore for about 21 million farmers. 

Andhra Pradesh waived loans of about Rs 20,000 crore, Punjab waived Rs 10,000 crore, Telangana announced a Rs 15,000-crore waiver while Karnataka announced Rs 8,000-crore waiver.

Another reason for defaults lay in misinterpretation of a Reserve Bank of India(RBI) circular issued last year, which gave MFIs an additional 60 days to recognise a loan as sub-standard if the dues were payable between November 1 and December 31 in the aftermath of demonetisation. 

With repayments badly impacted in the first few days after demonetisation, RBI had granted the dispensation to save MFIs from making large provisions on account of temporary defaults. 

“The defaults have been somewhat fuelled by misinterpretation of prudential norms of lending,” said Vishwanathan.

Many SFBs, which too have been heavily dependent on microfinance, had already made provisions for non-recovery of loans on account of debt waiver. Non-performing assets increased to more than five to six per cent from less than one per cent in the past year.

Ujjivan Financial Services, holding firm for Ujjivan Small Finance Bank, posted a net loss of Rs 12 crore in the second quarter of the present financial year, against a net profit of Rs 73 crore in the corresponding period a year before. 

In the first quarter of this financial year, too, the bank had posted a net loss of about Rs 75 crore. The bank had to make a provision of about Rs 88 crore in the last quarter on account of bad loans. 

Another listed SFB, Equitas Holding Ltd, reported its second-quarter net profit was down by 76 per cent at Rs 10.9 crore from Rs 46.3 crore last year, mostly on account of higher provisioning for bad loans.