Fitch not to assign top rating to microfinance cos

MUMBAI: Microfinance companies are unlikely to get a top rating from rating companies due to the ordinance passed by the Andhra government, which makes it mandatory to cap the interest component lower than the principal.

The ordinance states that in case the interest rate is higher, the MFI has to refund the amount, according to Sandeep Singh, senior director of Structured Finance, who also said the ratings firm is unlikely to assign a top rating for MFIs particularly, as the Andhra Ordinance puts a question mark on their viability. Fitch has received request from about three MFIs in the recent past to be rated for securitising their asset pool.

A report by Fitch Ratings on the sector as a whole, which also includes MFIs outside Andhra Pradesh, notes risks for the sector. These include high dependence on services, limited historical asset performance information as well as an evolving regulatory and legislative framework that could lead to unenforceability of underlying loans. In the absence of suitable factors to mitigate such risks, these transactions are unlikely to receive the highest long- or short-term ratings, said the report.

“The intricate servicing arrangements, coupled with a lack of institutional backup collection mechanisms, makes the rating of microfinance securitisations to be inextricably linked to that of the originator or the part which securitises its pool of assets,” said Deep N Mukherjee, director of Structured Finance.

The rapid growth of the MFI industry and its ability to affect the lives of a vast number of people has increasingly drawn the scrutiny of Indian regulators and many of them are currently going through a rough patch with regular credit lines being stopped.

Fitch, however, expects this market to mature over the long-term , with the creation of systems and structures that would enable the market to grow in a sustainable manner. Anticipated developments include the use of centralised credit bureaus to deal with cross-indebtedness , the growth of third-party servicing platforms and regulatory changes, leading to consistent and widely-accepted lending practices by microfinance lenders.

Matter of concern

Andhra ordinance states in case interest rate is higher, the MFI has to refund the amount

Fitch has received request from about three MFIs in the recent past to be rated for securitising their asset pool

Rating Agency has cited risks, including, high dependence on services & limited historical asset performance information

The rapid growth of MFIs & their ability to affect lives of a vast number of people have drawn regulators’ scrutiny