Mumbai: Micro-Credit Ratings International Ltd (M-Cril), the largest ratings agency in India’s Rs 20,000 crore microfinance industry, has alleged that other ratings agencies have been giving higher ratings to microfinance institutions (MFIs) without properly understanding the sector.
“They (other ratings agencies) have been too liberal in the assignment of grades to MFIs by giving one to two notches above from what we assigned,” M-Cril managing director Sanjay Sinha told Mint in an interview on Friday. “My point is that they do not understand the (microfinance) sector.” Sinha did not name any particular agency.
MFIs give tiny loans to poor borrowers, typically at an interest rate of 24%. They mainly source money from commercial banks to do business.
According to Sinha, such higher ratings provided a wrong image to the commercial banks about the creditworthiness of MFIs, prompting them to lend large amounts to them, which in turn resulted in issues such as multiple-lending that eventually led to a crisis in the sector.
“Commercial banks and investors that relied on such ratings were inevitably lulled into a comfort zone resulting in excessive lending at a time when the industry was headed for disaster,” Sinha said. “The incursion of the large corporate ratings agencies into the world of microfinance must bear part of the responsibility for the current mess in the Indian microfinance industry.”
Major ratings agencies active in the space—Crisil Ltd and Credit Analysis and Research Ltd (CARE)—refuted the allegations and justified their ability to rate MFIs.
“Our experience allows us to compare the business risk of the microfinance sector with that of other financial sector entities so that we can provide a better perspective to the investors in correctly placing the risk of investing in microfinance,” said D.R. Dogra, managing director of CARE. “While our holistic understanding of the financial sector helps in providing a lot of value to the investors, at the same time we understand the unique nature of microfinance activities and have specialized products and a dedicated team for the sector.”
Crisil, too, defended its ability to rate MFIs.
“Crisil has an in-depth understanding of the MFI sector. We have been working in this sector for over a decade and have evaluated around 250 MFIs to date, based on a robust evaluation process which includes branch visits and interactions with the borrowers of MFIs,” Crisil said in response to an email query. “Further, the risks in the sector are manifested in the Crisil ratings for MFIs. As far back as December 2009, eight out of the nine ratings assigned to MFIs were in rating categories of BBB and below.”
Some industry experts, however, did not share this view, saying major ratings agencies have a “shortfall” in terms of understanding the risks in the microfinance sector.
“Ratings agencies have a long way to go to build knowledge as far as working with the poor is concerned,” said Mathew Titus, executive director of Sa-Dhan, an association of MFIs.
“They (ratings agencies) have applied similar financial sector ratings to a completely different client set without questioning its relevance. In some sense, ratings agencies definitely have shortfall in terms of recognizing the ill that has plagued the market,” he said.
This is the second time in less than a fortnight that a major ratings agency has raised allegations of foul play against competitors.
Late August, Icra Ltd, one of the four major ratings agencies in India, had criticized the industry for making compromises to win business, sparking a debate on the credibility of the agencies in the country.
MFIs seek ratings from agencies either for the organization or for any specific instruments. A higher rating enables companies to bargain with banks for a better pricing of loans.
Starting operations in 1999, M-Cril has so far rated 900 MFIs as against 250 by India’s largest rater, Crisil; CARE has graded 75.
These ratings agencies also did not undertake sufficient branch-level investigation and interaction with clients while assigning ratings, Sinha said.
“As a result, these ratings agencies failed to sound the warning bell when the industry was clearly going off the rails from 2008, and especially in 2009,” he said. “Unfortunately, the Reserve Bank of India’s rules also favour the corporate agencies on the mistaken assumption that mere size rather than knowledge of and commitment to a specialized activity like microfinance enhances analytical capability.”
An official with a Hyderabad-based microlender, which used to approach M-Cril for ratings till a few years ago, said most MFIs stopped using M-Cril ratings as commercial banks started insisting for ratings from bigger ratings firms while sanctioning loans.
“Everybody used to get rated by M-Cril. The problem we faced is that when we attained a definite size, lenders and investors wanted us to get rated by major ratings agencies,” the official said, requesting anonymity.
India has four major ratings agencies Crisil, CARE, Fitch Ratings and Icra. Brickwork Ratings India Pvt. Ltd, another rater, is a relatively recent entrant to this space. Also, SME Rating Agency of India Ltd is active in the industry, but is largely limited to rating of small and medium enterprises.
Global ratings agency Standard and Poor’s holds a 51% stake in Crisil, Moody’s is the single largest shareholder in Icra with a 28.51% stake, while Fitch is unlisted. CARE, set up in 1993 and the only one controlled by local promoters, plans a listing this fiscal.
Andhra Pradesh, India’s fifth largest state and accounting for more than a quarter of the microlending industry, promulgated a law in October to control microlenders. This was after a series of reported suicides due to alleged coercive recovery practices adopted by some of them.
The law restricted MFIs from collecting weekly repayments, and made it mandatory that government approval be obtained if a borrower takes more than one loan.
While the repayment rate dropped to 5-10% following the state law, commercial banks, which typically provide 80% of the funds to the industry, stopped lending.