JOIN USStating damage to microfinance industry can affect credit-flow to rural poor, Crisil said six of the 12 MFIs have ratings that are in the ‘BB’ category or below.
The implementation of the Andhra Pradesh (AP) ordinance has triggered a chain of events that can permanently damage the business models of MFIs, by impairing their growth, asset quality, profitability, and capital-raising ability.
The Rs 25,000 crore (as on March 31, 2010) microfinance industry plays an important role in extending formal financial services to 28 million of India’s under-served rural poor; with the decline of the sector, the flow of credit to this segment of the population will be curtailed.
The AP ordinance has been highly unfavourable for the industry resulting in a precipitous drop in the collection efficiency and profitability of MFIs, especially those operating in Andhra where collections have plunged below 20 per cent, from nearly 99 per cent prior to the ordinance as MFIs found it difficult to make contact with borrower groups, to move them to a monthly repayment cycle in line with the ordinance. Fresh disbursements in Andhra have been negligible over the past few weeks.
Crisil believes that this would lead to a sharp increase in delinquencies for MFIs that have significant Andhra exposure. So far, MFIs with limited or no Andhra presence have maintained good collection levels, though their disbursement growth has reduced sharply.
Further, the flow of funding to the entire sector from the banking system has been severely constrained. Consequently, the liquidity position and growth prospects of many MFIs, including those operating outside AP have been affected. Structurally, the regulatory jurisdiction and framework for MFIs remains unclear, with actions by multiple authorities increasing the challenges for the industry.
Urgent steps
Unless urgent steps, including regulatory intervention, are taken to address these issues, these developments have a potential to materially weaken the business and financial risk profiles of MFIs and result in rating downgrades, the agency noted.
Another risk is that other states may initiate state-level legislation similar to the Andhra ordinance. Moreover, the regulatory environment for the sector could evolve further after the decision of Andhra Pradesh High Court, recommendations of the Malegam committee instituted by the Reserve Bank of India (RBI), any potential changes in RBI norms related to priority sector funding to the sector, and provisions of the microfinance bill proposed by the Ministry of Finance.
The rating agency has consistently highlighted that as an emerging sector, the MFI industry is exposed to the risk of changes in the political, legislative, and regulatory environment. Some of these risks are now becoming evident.
Crisil also rates nine securitisation transactions originated by MFIs. Only two of these transactions have some exposure to loans originated in AP.
The collection performance of all the rated pools remained strong until recently. The credit enhancements and the structural features currently protect investor payouts from any potential increase in delinquencies, and are consistent with the outstanding ratings.
It will continue to monitor the performance of these pools regularly, and will take appropriate rating actions in case collections drop significantly.