Stressed assets of non-banking financial companies- microfinance institutions (NBFC-MFIs) are estimated to have declined to around 14 per cent as of March 2022 from close to 22 per cent in September 2021, helped by revival in the economy and limited impact of the omicron variant, says a report.

However, stressed assets of NBFC-MFIs, which comprise of 30+ Portfolio at Risk (PAR) and loan book restructuring remains well above the pre-pandemic level of around 3 per cent, Crisil Ratings said in a report released on Monday.

"Stressed assets of NBFC-MFIs are estimated to have declined a significant 800 basis points to around 14 per cent as of March 2022, after peaking to approximately 22 per cent in September 2021," the report said. The reduction in stressed assets, along with improved collection efficiencies mark a recovery in the asset quality of NBFC-MFIs, supported by economic revival, limited impact of the omicron variant, and acclimatisation to the post pandemic 'new normal', it said.

The newly originated book (loans disbursed after July 2021) of NBFC-MFIs has demonstrated a steady performance, with 30+ PAR estimated at just 1-2 per cent.

Overall monthly collection efficiency was healthy at an average 97-100 per cent in the fourth quarter of last fiscal, the rating agency said.

However, foreclosures were higher in the last quarter of last fiscal. That, and the trend in the restructured book need close monitoring to assess incremental slippages, it said. The agency's Senior Director and Deputy Chief Ratings Officer Krishnan Sitaraman said the microfinance sector restructured around 10 per cent of its loan book under the Resolution Framework 2.0 announced by the Reserve Bank of India (RBI) in the wake of the second Covid-19 wave, compared with a mere 1-2 per cent in the first.

The extent of this varied between entities from 2 per cent to 17 per cent and had a strong correlation with the regional impact of the second wave, which had affected the informal economy and rural India more drastically than the first, it said.

"Collection efficiency of the restructured book, billing for which began in the final quarter of last fiscal, is currently at 60-65 per cent. This indicates a higher probability of slippages," Sitaraman said.

 Given the sizeable restructuring and likely slippages -- since they cater to the more vulnerable sections of society -- most NBFC-MFIs have increased provisioning to fortify their balance sheets against asset quality risks, the agency said.

Now that the RBI has removed the interest margin cap on lending rates under the new regulatory framework for microfinance loans, they will also have the flexibility to adopt risk-based pricing which can provide headroom to further enhance provisioning buffers if required, it said.

"NBFC-MFIs increased provisions to nearly 6 per cent of the loan book as of March 2022 from only 2.5 per cent as of March 2020. With the adoption of risk-based pricing, they will likely continue to maintain higher provisions in their attempt to build a more resilient balance sheet," the agency's Director Poonam Upadhyay said.