Mumbai, July 21: The collection efficiency of micro-finance institutions (MFIs) has improved in June in the backdrop of ease in lockdown, says an ICRA report.

It said relaxation in lockdown restriction has enabled domestic MFIs to re-establish connection and to convince a large number of borrowers to start paying their instalments.

This resulted in better than expected collection efficiency in June 2020 for the rating agency's sample of 21 MFIs, constituting around 70 per cent of the industry, excluding small finance banks, it said.

"For most MFIs, especially those with a sizable presence in rural regions, the collection efficiency has improved to 40-70 per cent in June 2020, as compared to a cumulative collection efficiency of less than 10 per cent in April-May 2020,” the report noted.

ICRA further said that based on discussions with industry players, borrowers in rural areas who are engaged in agricultural, dairy, and allied services have performed better than borrowers from other industries.

Analysis of 21 MFIs showed that the liquidity on the balance sheet of most MFIs is not sufficient to meet their debt-servicing obligations and operating expenditure during the June-September 2020 period, the report stated.

"Out of the ICRA sample of 21 entities, 16 have a balance sheet liquidity cover of less than one time for the June-September 2020 period, with the majority (11 entities) being in the 'BBB' and below rating category," Sachin Sachdeva, vice president (financial sector ratings), ICRA, said.

However, the presence of undrawn sanctioned lines, ramp-up in collections, and expectations of a partial moratorium on borrowings result in improvement in the liquidity cover (adjusted) and turns the shortfall into a surplus, except for a few entities, he said.

Sachdeva added that the flow of liquidity to MFIs is expected to improve further as the remaining targeted long-term repo operation (TLTRO) funds are to be invested by the end of July 2020.

Apart from boosting liquidity, the MFIs are taking steps to improve their operating profits, the report said.

It added that MFIs are focusing on rationalising their cost structures by way of rent renegotiation or branch consolidation, salary cuts, incentive reduction or retrenchments.