As if current woes were not enough for microfinance institutions (MFIs), it might get tougher for them to get the highest rating for the liquid instruments created out of their loans to raise cheap funds.
The securitised paper floated by Indian MFIs is unlikely to receive the highest rating of long– or short–term, as a consequence of the unique risks they face.
Besides being a unique asset class, the limited historical asset performance and an evolving regulatory and legal framework could prevent the highest rating for the MFI securitised paper, according to rating agency Fitch India.
Securitisation is the conversion of existing assets or future cash flows into marketable securities. It thus deals with the conversion of non-marketable assets into marketable ones.
An executive with a public sector bond house said the recent ordinance passed by Andhra Pradesh putting restrictions on loan recovery from MFI clients had made the situation worse. It had cast a shadow on the recovery and repayment practices.
With a slowdown in business and hurdles in recovery, MFIs may find it difficult to securitise existing loans. This could increase their cost of funds and impact valuations.
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“The intricate servicing arrangements, coupled with lack of institutional back-up collection mechanisms, link the rating of microfinance securitisation to that of the originator,” Fitch said.
In the absence of suitable mitigants with respect to such counterparties, Fitch will link the rating of the transactions to that of the originator,” said Deep N Mukherjee, director, Structured Finance.
The rapid growth of MFIs and its ability to affect the lives of a vast number of people have increasingly drawn the scrutiny of Indian regulators.
Regulatory change is difficult to quantify. The current uncertainly surrounding the regulatory environment would make it difficult to assign the ‘AAA(ind)(SO)’/’F1+(ind)(SO)’ rating to microfinance securitisation, says Sandeep Singh, senior director at Fitch.
To date, Fitch has not assigned any rating to Indian microfinance securitisations.
Fitch expects the MFI market, more specifically the MFI securitisation 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.
The use of centralised credit bureaus to deal with cross-indebtedness and regulatory changes leading to consistent and widely accepted lending practices by MFIs will help improve market environment.