KARACHI: Classified assets of non-bank microfinance companies (NBMFCs) surged almost 347 per cent in 2020, according to the latest Financial Stability Review of the State Bank of Pakistan (SBP).

The central bank has dubbed the steep rise in the NBMFCs’ classified assets, which are loans with a high probability of default, a “real cause of concern”.

NBMFCs form the largest segment within the country’s non-bank financial institutions (NBFCs) after the asset management industry.

The SBP noted that the increase in associated provisioning has not been on a proportionate basis. This has resulted in a decline in the provisioning coverage from 54.5pc in 2019 to 41.5pc in 2020. Therefore, the ratio of classified assets to microcredit loans has risen from 1.5pc to 7.4pc in just one year.

There are a total of 26 NBMFCs with a total asset base of Rs129 billion. Some of the better known NBMFCs include the national and provincial rural support programmes as well as Akhuwat Islamic Microfinance and Kashf Foundation.

The NBMFC sector is “highly concentrated” with the top three entities having 68.7pc of total microcredit loans. The sector recorded a decline of 9.3pc in microcredit loans in 2020 due to the coronavirus-related lockdowns and the ensuing slowdown in economic activity.

According to the SBP, one reason for the rapid deterioration in the asset quality could be the fact that most microfinance borrowers were not unaware of the loan deferment schemes, resulting in increasing delinquencies amid the pandemic.

The central bank believes the worsening quality of loans in the NBMFC sector may have an adverse impact on microfinance intermediaries, such as investment finance companies (IFCs) and other wholesale lenders. The role of these intermediaries is to mobilise funding from donors as well as commercial lenders like 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 a financing of Rs21bn. Excluding the top two NBMFCs, funds provided by the IFC to the remaining 15 companies constitutes 68.8pc of their total borrowings, which is “quite significant for these small-sized firms.”

The SBP said growing classified assets may raise concerns about the health of the investment finance company that mobilises funding for NBMFCs.

“The asset quality issues that the NBMFC sector is currently facing can portend the build-up of a system-wide risk for the microfinance intermediaries and the banking sector,” it said, adding that the quantum of the commercial banks’ exposure to the sector remains minute.

Published in Dawn, July 11th, 2021