NBMFC bad debts increase by 347 pc – Journal
KARACHI: The classified assets of non-bank microfinance companies (NBMFCs) jumped nearly 347% in 2020, according to the latest financial stability review from the State Bank of Pakistan (SBP).
The central bank called the sharp rise in classified assets of NBMFCs, which are loans with a high probability of default, as “real cause for concern”.
NBMFCs form the second largest segment within the country’s non-bank financial institutions (NBFCs) after the asset management industry.
The SBP noted that the increase in the associated provisioning was not proportional. This resulted in a decrease in provisioning coverage from 54.5% in 2019 to 41.5% in 2020. Thus, the ratio of classified assets / microcredit loans fell from 1.5% to 7.4% in just one year.
There are a total of 26 NBMFCs with a total asset base of Rs129 billion. Some of the more well-known NBMFCs include National and Provincial Rural Support Programs as well as Akhuwat Islamic Microfinance and Kashf Foundation.
The NBMFC sector is “very concentrated”, the first three entities holding 68.7 pc of total microcredit loans. The sector saw a 9.3% drop in microcredit lending in 2020 due to lockdowns related to the coronavirus and the resulting slowdown in economic activity.
According to the SBP, one of the reasons for the rapid deterioration in asset quality could be the fact that most microfinance borrowers were not ignoring loan deferral programs, which led to an increase in defaults. in the midst of the pandemic.
The central bank believes that the deterioration in loan quality in the NBMFC sector may have a negative impact on microfinance intermediaries, such as investment finance companies (IFCs) and other wholesale lenders. The role of these intermediaries is to mobilize funding from donors as well as commercial lenders such as development agencies, financiers, commercial banks and capital markets.
As an example, the SBP document referred to a “leading IFC” that had provided 17 non-bank microfinance firms with financing of Rs 21 billion. Excluding the two main NBMFCs, the funds provided by IFC to the remaining 15 companies represent 68.8% of their total borrowing, which is “quite large for these small companies”.
The SBP said the growth in classified assets could raise concerns about the health of the investment finance company raising funds for NBMFCs.
“The asset quality issues that the NBMFC industry currently faces may portend the build-up of system-wide risk for microfinance intermediaries and the banking sector,” he said. , adding that the amount of exposure of commercial banks to the sector remains minimal.
Posted in Dawn, July 11, 2021