Rise in Covid cases may add to NBFI’s asset quality risks: Fitch

Fitch Ratings said Friday that rising COVID cases could delay the resumption of lending to MSMEs and microfinance, and add to asset quality risks for non-bank financial institutions.

Fitch estimates that India’s economic growth for this fiscal year ending March 2022 will be 8.4%, but said the deterioration in Indian NBFI asset quality in 2022 will come mainly from the MSME and MFI sectors. , as well as the financing of real estate construction.

The Reserve Bank’s Financial Stability Report, released in December 2021, noted emerging signs of strain among MSMEs as well as microfinance. These borrowers typically operate with limited cash reserves and capital, and have suffered disproportionately during the pandemic due to their more vulnerable business franchises, the rating agency said.

The surge in COVID-19 cases in India associated with the Omicron variant could delay the recovery of micro, small and medium-sized enterprises (MSMEs) and microfinance lending, adding to asset quality risks for Indian non-bank financial institutions ( NBFI), Fitch Notes said in a statement.

India has added over 2.64 lakh new COVID cases in the past 24 hours. So far, 5,753 cases of the Omicron variant have been detected in the country.

MSME business activities resumed in the second half of 2021, but remain below pre-pandemic levels, but the increase in Omicron cases in January 2022 may temporarily disrupt the recovery.

Fitch expects the scale of disruption associated with the wave to be modest compared to India’s initial lockdown in 2020 or the Delta variant wave of 2021.

Still, it’s likely that Omicron’s surge will have some impact as local restrictions are reintroduced. It comes at a time when financial reserves have already been eroded for many small borrowers, he said.

Pressure on MSMEs will also increase as the government’s Emergency Line of Credit Guarantee (ECLGS) scheme, first launched in May 2020, comes to an end in the coming months. Most beneficiaries of the scheme have been micro and small businesses, and new disbursements under the scheme will cease by the end of June 2022.

All non-performing loans (NPLs) under the various iterations of the program will begin to appear as applicable moratoriums on principal repayments expire over the next one to two years, he said.

Recoveries from MSMEs have been slow due to slower liquidation of guarantees during the pandemic. We expect property-backed loan recoveries in semi-urban areas to continue to be hampered in 2022 by relatively low liquidity in these real estate markets.

For microfinance, further challenges could arise from upcoming elections in five major states, including Uttar Pradesh (UP). Political pressure can often hamper loan collection efforts during election season, and UP is home to a large rural population and a microfinance sector. The state accounted for about 8% of outstanding microfinance loans in India as of end-September 2021, the agency said.

Fitch expects tensions in the MSME and microfinance segments to result in higher NPLs, particularly as enhanced impairment recognition standards come into effect by March 2022.

(Only the title and image of this report may have been edited by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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