According to a report by UBS Securities, the pace of loan defaults by microfinance borrowers has increased rapidly in October. The borrowers’ portfolio at risk (i.e. how much of the total loan is risky) has increased by 130 basis points to 17.5% between September and October. Earlier, there was an increase of 380 basis points in the March to September period.
Portfolio or PAR is the outstanding loan portfolio that is in default and can be calculated in percentage terms.
How much did the outstanding loan increase in which period?
For the microfinance industry, the share of loans outstanding for 1-30 days increased by 30 basis points on a monthly basis during October. While loans that are 31-90 days old increased by 40 basis points to 2.9%. It has also increased by 170 basis points since March.
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The share of loans overdue for more than 90 days rose 60 basis points on a monthly basis to 12.2% last month, after rising 110 basis points during March-September.
Bihar, Tamil Nadu, Odisha, Uttar Pradesh and Jharkhand have seen the highest monthly increase in 1-90 days old loans. Overall, these states account for 48% of the MFI market share.
What did the brokerage say was the reason behind the increase?
UBS Securities expects most loans to go from default to non-performing status. This will keep the slippage level high in the last six months of the current financial year. According to the brokerage, floods have affected some districts and this could be the reason for a sharp increase in the number of 1-90 days old loans.
In fact, the Micro Finance Institutions Network, a self-regulatory organization for the sector, has tightened the rules related to micro-lending. It has made several changes. These include reducing the number of lenders to borrow from four to three.
UBS Securities considers this move to be positive in the mid-term. But this may reduce liquidity of weak borrowers and lead to a sharp increase in defaults. The brokerage firm said that the 1-90 day portfolio at risk will be closely monitored. It has given NEUTRAL rating to Bandhan Bank. Its MFI loan book is 46%.
The microfinance sector is likely to face stress for the rest of this year. Over-leveraging of customers, inability to repay loans and lending to customers with fake ID cards may be among the problems of the microfinance sector.
