ICRA Cuts Outlook On Janalakshmi Financial Services As Concerns Over Microfinance Sector Mount
Outlook on Janalakhsmi Financial Services’ credit rating cut due to rising asset quality concerns
Ratings agency ICRA has cut the outlook on its credit rating for Janalakshmi Financial Services Ltd (JFSL), citing the adverse impact of demonetisation and increasing political interference in some states.
ICRA has retained Janalakshmi’s credit rating at “A+” but revised the outlook on that rating from stable to negative, it said in a note on Tuesday.
The revision in outlook factors in the adverse impact of demonetisation on asset quality with overall collections efficiency affected by the limited currency supply, disruption in borrower cash flows, and political intervention in certain states namely, Uttar Pradesh, Maharashtra and Madhya Pradesh.ICRA statement
The demonetisation of Rs 500 and Rs 1,000 notes by the government in November, which pulled around 86 percent of currency out of circulation, resulted in a cash shortage that affected collections for several microfinance institutions.
Soon after, political parties started to demand a waiver of farm loans, which led to uncertainty in the microfinance market.In Uttar Pradesh, specifically, poll promises made ahead of the assembly elections by several political parties have given rise to expectations of a farm loan waiver. Such a move, bankers said, would affect credit discipline.
In its note, the rating agency said these factors have led to a drop in Janalakshmi’s collection efficiency, an indicator of the timely repayment of credit. Collection efficiency has dipped to 78 percent in January from 98 percent in September, said ICRA. As a result, the quantum of loans on which payments are past due for over 30 days has risen to 22.6 percent at the end of January from 1.0 percent of the loan book as on September 30. At the same time, the quantum of loans with payments overdue for more than 60 days has risen to 11 percent as on January 31.
On account of Janalakshmi’s marginal borrower profile and the fact that the loans are unsecured, the rating agency anticipates that the process of recovery of overdue loans, especially those that are overdue for over 60 days, could take a long time.
Janalakshmi might need to provide for loan losses in the near future, and this will put pressure on profitability and capitalisation, ICRA said but pointed out that the company is currently well capitalised.
The ratings agency, however, cautioned that a large portion of Janalakshmi’s total funding, 32 percent, is in the form of debentures. Most of these debentures carry financial and operational covenants, it said. This means that lenders to Janalakshmi will have the option to call back loans in case its operational performance dips below a point.
On Monday, ICRA had downgraded the outlook for another microfinance firm - Satin Creditcare Network Ltd. In that case too, ICRA had raised similar concerns and said that collection efficiency has fallen due to limited currency supply and political interference.
Earlier this month, India’s fourth largest microfinance company by loan portfolio, Bharat Financial Inclusion Ltd, told analysts that it may see 4.5 percent of its loan portfolio turn bad if collections do not recover to pre-demonetisation levels. The company said that 4.5 percent of its loan book had seen no payments for more than eight weeks. This compares to 0.2 percent of the loan book that was overdue in the quarter-ended December 2016.
The concerns seem to be spread across the industry.
In a quarterly update on February 16, industry body Microfinance Institutions Network (MFIN) noted that disbursements had fallen and asset quality had deteriorated across the industry in the third quarter of the current fiscal. Portfolio at risk (PAR) over a 30-day horizon has increased to 7.52 percent from under 1 percent in the previous quarter, MFIN said.