The revival of economic activities in green and orange zones will provide relief to microfinance institutions (MFIs) and they can see a faster turnaround, according to a report by Icra.
The report said that MFIs with a higher share of portfolio in the green and orange zones are likely to witness relatively lower delinquencies than the industry average.
The findings are based on analyses of 30 MFIs and small finance banks (SFBs). The rating agency studied their portfolio breakup across zones and the likely impact on the credit costs going forward.
In terms of portfolio distribution of the sample set, around 69 per cent of it falls in green and orange zone.
"Of the sample, most of the entities have more than 50 per cent of their portfolio in the green and orange zones. In these areas, the turnaround is expected to be faster and collections higher than the red zone, thereby providing some relief to MFIs," the rating agency said.
The Ministry of Health and Family Welfare, Government of India (GoI) has classified the country into three zones, namely green, orange and red (along with containment zones within districts), to fight the coronavirus pandemic.
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Varying levels of economic activities have been allowed across the zones.
The areas in green zone have maximum easing of restrictions and are able to start economic activity gradually. It is followed by orange zone and red zone.
Around 56 per cent of the country's districts fall under green and orange zones, with the balance 44 per cent in red zone.
The report said that in green and orange zones, the overall credit costs/eventual loss may be curtailed, provided MFIs are able to maintain a better connect with the customers.
"Once the lockdown is eased, the collection efficiency of MFIs would be a function of both the borrowers' cash flows as well as the MFIs' ability to re-establish a connect with the borrowers," Icra Vice President (financial sector ratings) Sachin Sachdeva said.
Assuming a 150-250 basis point (bps) increase in credit costs in green and orange zones, and double of that in red zone, the overall credit cost (including write-offs) for MFIs is expected to increase by 3.5-5 per cent for FY2021 from around 1.7 per cent in April-September FY2020, the rating agency said.