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Rating agencies sound caution on microfinance institutions……Dinesh Unnikrishnan
Agencies put ratings as well as securitization transactions originated by microfinance firms under credit watch The ghost of the recent microfinance ordinance in Andhra Pradesh continues to haunt the ailing industry.
Major credit rating agencies have either put the ratings of microfinance institutions (MFIs) and the securitization transactions originated by them under credit watch or have adopted a cautious approach on account of the prevailing uncertainty in the sector.
The Indian microfinance industry plunged into a crisis early last month following a controversial ordinance issued by the state government in Andhra Pradesh, its biggest market, restricting MFI operations.
Earlier, the finance ministry had also expressed its concern on the high interest rates charged by microlenders and the alleged strong-arm methods used by some of them to recover loans for poor borrowers. The Andhra Pradesh ordinance seeks to put a strict check on MFI operations in the state and restrict coercive loan recovery methods.
Last week, rating agency Credit Analysis and Research Ltd or Care put all its ratings on MFIs and the securitization transactions originated by these firms under “credit watch”. Another leading agency, Fitch Ratings, on Tuesday said it will not accord “high ratings” to any securitization transactions in the immediate future due to the issues faced by the sector.
Late last month, rating agency CRISIL Ltd, in a credit alert, also said it is conducting a comprehensive assessment of the impact of developments in the microfinance sector on its outstanding ratings on MFIs.
Securitization is the process in which lenders pool loans into securities and sell them to investors. Typically, banks and non-banking financial institutions are active in the business. The securitization market in the microfinance sector is relatively small—around Rs.500 crore of the Rs.26,780 crore securitization market in India, according to data from Care.
“We have put all ratings of microfinance institutions, including those of securitization transactions, under watch as we are unable to take a view till clarity emerges,” D.R. Dogra, managing director and chief executive officer of Care Ltd, said. These rating actions will likely add to the uncertainty in the sector.
Care has outstanding ratings on five MFIs and four securitization transactions. It has put ratings of all four transactions and that of two MFI ratings having large exposure to Andhra Pradesh on watch.
Crisil has outstanding ratings on 12 MFIs and nine securitization transactions originated by MFIs.
“We may not give high ratings to any securitization transactions at least in the immediate future, say three to six months,” Deep N. Mukherjee, director, structured finance at Fitch Ratings said during a media interaction in Mumbai.
Fitch Ratings has so far rated three MFIs but no MFI securitization product.
According to Fitch, Indian microfinance securitization transactions are unlikely to receive the highest long or short-term ratings as a consequence of the risks they face, which, the agency said, include nature of underlying asset class and the evolving regulatory and legal framework.
“While Fitch cannot anticipate regulatory and/or legislative change, the current uncertainty surrounding the regulatory environment would make it difficult to assign ‘AAA(ind)(so)’/F1+(ind)(SO) ratings to any securitization,” Fitch said.
Andhra Pradesh accounts for more than a quarter of the total loan outstanding of MFIs in the country and the largest number of microfinance client-base (6.25 million) among Indian states, according to Sadhan, an association of such firms.
It estimates that the total loan outstanding of 264 registered MFIs registered with it at around Rs.18,343 crore as on 31 March 2010, out of which Andhra Pradesh alone has Rs.5,210.8 crore and a client outreach of nearly 6.2 million clients, followed by Tamil Nadu (4.57 million) and Karnataka (3.74 million).
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