A microfinance lender has 35% of its Rs 2,000 crore book in one state hit by floods. If portfolio at risk there rises to 20% and half of it is lost, estimate the credit cost and its hit on Rs 400 crore of net worth.

The credit cost is about Rs 70 crore, 17.5% of net worth, from one state's flood. Rs 700 crore sits in the state; 20% at risk is Rs 140 crore and half of that is lost. After an illustrative 25% tax effect the hit is about Rs 52.5 crore. The same flood on a book with no state above 10% would cost about Rs 20 crore, 5% of net worth. Concentration, not the flood, turned a local disaster into a company-level capital event.

Walk from the book to the loss one step at a time. 35% of Rs 2,000 crore is Rs 700 crore in the flood state; portfolio at riskThe outstanding balance of loans with any amount overdue, as a share of the book; the standard early warning measure in microfinance. of 20% is Rs 140 crore; losing half of it costs Rs 70 crore. Microfinance loans are unsecured, so there is no collateral to cushion the loss; the half that is recovered comes from borrowers who resume paying once their livelihoods return.

Set it against the equity that absorbs it. Rs 70 crore is 17.5% of Rs 400 crore of net worth, about Rs 52.5 crore after an illustrative tax effect, and the capital ratio falls from 20% to about 17.1% if the book is fully risk weighted. Cash suffers too: 14 points of collection shortfall on Rs 40 crore of monthly dues is about Rs 5.6 crore a month, Rs 33.6 crore over six months, while the company still owes its own lenders on schedule. Gramotsa survives, but it has lost most of a year's profit and some of its lenders' confidence.

Run the same flood on a book where no state is above 10%. A farmer who plants one field loses the whole harvest to one hailstorm; a farmer with five fields in five villages loses one. With Rs 200 crore in the state, 20% at risk and half lost is Rs 20 crore, 5% of net worth, a bad quarter rather than a capital event. The flood is the same; the concentration decided the size of the damage.

Close with the actions. Provide now, at the estimate, rather than wait for loans to cross 90 days; tell lenders early with the numbers; offer affected borrowers a structured moratorium rather than let arrears pile up; and set a state concentration limit, with the flood as the scenario that sizes it. Watch the neighbouring districts too: repayment discipline in group lending can weaken when borrowers see others not paying.