MFIs finding it difficult to make contact with borrower groups due to weekly collections.
Ratings agency Crisil has put 12 microfinance institutions (MFIs) – including the countryâs largest, SKS Microfinance, and Spandana Sphoorty Financial – having bulk of exposure in Andhra Pradesh on a rating watch with ânegative implicationsâ.
"Six of these MFIs have ratings that are in the âBBâ category or below. The implementation of the Andhra Pradesh (Andhra) 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 rating major said on Monday.
The Andhra Pradesh government recently promulgated an ordinance to regulate MFIs, after a number of suicides were reported in the state, allegedly due to strong-arm tactics of these institutions for recovery of loans. The Rs 25,000-crore MFI industry was severely hit after the state government asked MFIs to get registered with state agencies and banned weekly collections. The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, 2010, came into effect on October 15.
According to Crisil estimates, loan collections in Andhra have plummeted below 20 per cent from nearly 99 per cent prior to the ordinance and MFIs are finding it difficult to make contact with borrower groups due to the transition from weekly to monthly collection.
The agency said fresh disbursements in Andhra had been negligible over the past few weeks, which could lead to a sharp increase in delinquencies for MFIs that had significant Andhra exposure.
The state governmentâs move had affected the fund flow from banks and as a result, the liquidity position and growth prospects of many MFIs outside the state had also been affected, Crisil said. So far, MFIs with limited or no Andhra presence have maintained good collection levels, though their disbursement growth has reduced sharply.
Noting that MFIsâ ability to raise external funding is significantly constrained and access to fresh loans from banks and financial institutions has dropped materially.
"It is possible that bank funding to the sector will resume later, but the timing and extent of such funding are uncertain. In addition, the quality of the banksâ exposure to this sector could weaken from the current strong levels," it said.
Reduced access to funding affects MFIsâ ability to service debt and limits their fresh disbursements, which can have a cascading effect on their growth and asset quality in the near term.
"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. Crisil will actively monitor developments in the sector and take appropriate rating actions."
Out of the nine securitisation transactions of MFIs that are rated by Crisil, two of them have some exposure to loans originated in Andhra Pradesh. "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," Crisil said.
Last week, Fitch India had said the securitised paper floated by Indian MFIs was unlikely to receive the highest long– or short–term ratings as a consequence of the unique risks they faced.
The limited historical asset performance and evolving regulatory and legal framework would also prevent highest rating for MFI securitised paper, according Fitch India.