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Microfinance, unsecured SME loan pools to face most stress if lockdowns turn more severe: ICRA

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YoY gross bank credit deployment to MSEs in January remained over 6-per cent. (Representative image)

Credit and Finance for MSMEs: Microfinance and unsecured SME loan pools are likely to face the most stress among retail loans if there is an increase in the severity of lockdowns in various cities, according to credit rating agency ICRA. While Covid cases continue to explode in April even as state governments have been mounting restrictions to arrest the jump, concerns over the asset quality of retail loans of non-banking financial companies have been raised. “The restrictions on movement would have a bearing on collection efforts for the NBFCs, especially for microfinance loans where cash collections still remain dominant,” the agency said in its latest report.

“The restrictions at present are localized and less harsh, but the severity has been gradually increasing as the surge in Covid cases is yet to be brought under control. In ICRA-rated securitisation transactions, we had seen microfinance and unsecured SME loan pools report the highest delinquencies last year post the end of the moratorium period,” said Abhishek Dafria, Vice President and Head – Structured Finance Ratings at ICRA. Vehicle loan pools and housing loan/loan against property pools followed SME loans in terms of delinquencies.

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Domestic securitisation volumes had witnessed a decline to a quarterly record low of around Rs 7,500 crore in Q1 FY2021 because of the national lockdown even as there was healthy sequential growth in subsequent quarters with the volume of around Rs 40,000 crore in Q4 FY2021. “Following the second wave of the pandemic, ICRA expects securitisation volumes to again get impacted in Q1 FY2022 as NBFCs and HFCs will be more selective in fresh lending thereby reducing their financing needs while the investors for securitised pools may again exhibit a ‘wait and watch’ approach.”

“Securitisation of microfinance and SME loans which had seen around 70 per cent Y-o-Y decline in FY2021 would face the brunt. Nonetheless, if the rise in Covid cases is brought under control soon with limited impact on the economic activities, we expect overall securitisation volumes to witness a 40-50 per cent Y-o-Y increase in FY2022 with a high proportion of securitisation happening in the second half of the fiscal,” added Dafria.

Meanwhile, YoY gross bank credit deployment to micro and small enterprises (MSEs) in January remained over 6-per cent at Rs 11.48 lakh crore from Rs 10.79 lakh crore in January 2020, according to the March 2021 bulletin of the Reserve Bank of India. However, the January YoY growth contracted marginally by 0.2 per cent from 6.6 per cent December YoY growth. The deployment in December 2020 was at Rs 11.31 lakh crore vis-à-vis Rs 10.61 lakh crore during the year-ago period.

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