ICRA Flags Asset Quality Risks For Microfinance Lending in Assam
A Central Reserve Police Force (CRPF) officer stands guard at a government office during the release of the National Register of Citizens (NRC) in Guwahati, Assam, India, on Saturday, Aug. 31, 2019. Photographer: Dhiraj Singh/Bloomberg

ICRA Flags Asset Quality Risks For Microfinance Lending in Assam

Social unrest and protests in Assam have led to an increase in delinquencies for banks and microfinance lenders across the state, according to rating agency ICRA. Assam has been one of the fastest growing markets for microfinance in recent years, with outstanding loans rising to Rs 12,600 crore.

According to ICRA, the share of the portfolio which is overdue between 0 and 30 days rose sharply to around 10 percent in the quarter ended December 2019 from 1.5 percent in September. Loans which are 30-days past due rose to 2 percent from 1 percent over the same time period, the rating agency said.

The rating agency, however, said non performing assets, including loans overdue by more than 90 days, may remain low.

ICRA attributed signs of increased stress to recent protests. The districts of Sonitpur, Golaghat, Jarhat, Sivasagar, Dibrugarh and Tinsukia have been highly affected as the center meetings could not take place, the rating agency said.

The recent protests in Assam have negatively impacted MFI operations and the softer bucket delinquencies (0-30 days past due) have shot up in December 2019. However, the actual transitioning of these overdue MFI loans to non-performing assets is estimated to be lower on account of expected gradual improvement in overall scenario and implementation of effective collection strategies in affected districts by the lenders.
Abhishek Dafria, Vice President and Head - Structured Finance Ratings, ICRA

Protests in Assam had begun in 2018 against the Supreme Court-mandated National Register of Citizens. The protests escalated in September last year after the state government published the final NRC list—which excluded over 1.9 million people.

There was also a groundswell of public opposition to the central government’s amendments to the Citizenship Act of 1955 in December last year, leading to week-long bandhs. That prompted the government to shut internet and impose Section 144 of the Criminal Procedure Code across districts in the north-eastern state.

Manoj Nambiar, chairperson of Microfinance Institutions Network and managing director of Arohan Financial Services, said the unrest in the last few months led to a rise in delinquencies. “There are many customers who are stressed due to business and financial reasons in the last few months but there are also some customers who have taken advantage of this situation and resorted to wilful defaults.”

He said Assam historically has had one of the best credit rankings and as of September 2019 only around 0.32 percent of borrowers of microlenders from the state had defaulted. “This jumped by 10x in the last three months, although things on the ground are slowly improving as customers who didn’t pay their instalments after Dec. 10 are now starting to come back and pay their dues.”

In its report, ICRA said that along with a deterioration in asset quality, there has also been a dip in the collection efficiency of micro lenders. Average monthly collection efficiency of securitised pools of loans originated in the state dropped to 92 percent in December 2019 from 98.4 percent in September 2019, ICRA said.

During December, the monthly collection efficiency of the 10 ICRA-rated loan pools ranged between 72.8 and 99.8 percent, it said.

Gunajit Bayan, associate vice-president of North East Small Finance Bank, told BloombergQuint that the unrest in Assam disrupted lenders’ collection ability as their agents couldn’t meet borrowers at collection centres.

“…after October there was a spike in non-repayments,” Bayan said. “Recoveries on a monthly basis had dropped to around 20-30 percent in November and December but it has improved to 50-60 percent this month.”

Dafria of ICRA, however, expects the situation to stabilise in the coming weeks though loan growth will take a hit. “NBFC-MFIs’ portfolio growth in Assam would remain muted in the near term as lending has been tightened in the region.”

Both Nambiar and Dafria said lenders would have to record the defaults—be it 30, 60 or 90 days past due—even if they allow borrowers to defer payments. “The non-performing asset figures for MFIs will be higher in December 2019 compared to September,” Dafria said, adding that they would reduce in the coming months.

The Micro Finance Institutions Network had last month asked the central bank to permit a forbearance by microlenders to extend payments for customers in certain districts in Assam. Since the regulator hasn’t given permission, lenders must deal with customers on a one-on-one basis and ensure there’s no inactivity in their accounts, Nambiar said.

“Credit bureaus track customers’ repayments and since Jan.1 this year MFIs have been uploading data to the credit score bureaus on a daily basis,” he said. “So if a customer defaults on their repayment would see a reflection in their credit score immediately, so that acts as an incentive.”

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