Fitch Ratings India today ruled out rating any securitised papers from troubled microfinance institutions (MFI), saying the industry still doesn't have any of the primary requisites for being done so, and warned that any such move at this juncture will be troublesome for MFI investors.
The report comes in the background of the trouble brewing in the entire MFI industry, since the Andhra Pradesh Ordinance last month which aimed at reining in the MFIs and their thuggish recovery agents.
On top of it, more and more banks, which are the cheapest source of funds for MFIs, have been unwilling to extend fresh funds, as they feel that the former are making a killing with their cheap funds by charging exorbitant interest from the hapless small borrowers.
Banks have been unofficially asking them to cap the interest rate at 24 per cent annum against their average rate of 36 per cent and upwards.
Releasing its first-ever report on the microfinance industry released here today, Fitch has highlighted the risks in microfinance securitisation, a process through which an MFI pools its debts and convert them into securitised papers and sell to prospective investors.
But prior to this MFIs need to get their debts rated by agencies.
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"The intricate servicing arrangements, coupled with a lack of institutional back-up collection mechanisms, make the rating of microfinance securitisations to be inextricably linked to that of the originator/servicer. In the absence of suitable mitigants with respect to such counterparts, we will link the rating of the transactions to the rating of the originator/servicer," said Fitch India Director (Structured Finance) Deep N Mukherjee in the report.
However, they said that other agencies are still rating microfinance securitisation, though on a small scale.
Fitch's Senior Director (Structured Finance) Sandeep Singh added: "While Fitch cannot anticipate regulatory changes, the current uncertainty surrounding the regulatory environment will make it difficult for us to assign higher ratings to these securitisations."
Stating that the domestic MFI industry is not mature enough for securitisation, unlike those in Cuba and Bolivia, where this is successfully done, the report says the domestic players have neither the bandwidth to service themselves nor do they have a track record to show the health of their asset portfolio.
On top of it there is clear absence of a strong and wide-reaching regulatory framework for the industry.
Hence, the agency warns that in the absence of any of these fundamental requisites and the mitigants to these risks in place, MFI securitisation would, if done rampantly, end up as an American sub-prime crisis like situation, as it would lead to unenforceability of the underlying loans.
MFI securitisation is still at a very nascent phase in the country, with the overall tractions touching barely Rs 500 crore in the past four-five months involving under 10 such deals.
The domestic MFI industry has been recording at a compounded annual growth rate of 80 per cent since the past four years, while the number of borrowers has grown by a CAGR of 58 per cent during the same period.
On the asset quality front, MFIs have been witnessing steady improvement in the portfolio to risk under 30 days loans from 3.5 per cent in 2005 to 0.7 per cent in 2009.
Similarly, there has been a steady increase in the loan size too.