CRISIL has downgraded its ratings on five microfinance institutions (MFIs): the ratings continue to be on ‘Rating Watch with Negative Implications’ (list attached). In November 2010, CRISIL had placed its outstanding ratings on the debt instruments of 12 MFIs on ‘Rating Watch with Negative Implications’ (refer to release, ‘CRISIL places ratings of MFIs on Rating Watch with Negative Implications’ dated November 22, 2010).
Since then, the funding risks for MFIs have become more pronounced. In addition, the regulatory jurisdiction and landscape for MFIs remains uncertain. In fact, there has been no let up in the challenging operating environment, with the ordinance issued by the Government of Andhra Pradesh being converted into a bill with no changes. Collection efficiency in Andhra Pradesh continues to be low.
One commercial bank recently decided to reduce the loan facilities extended to MFIs, and has sought repayment of loans ahead of the original due dates. CRISIL understands that the loan agreements contain clauses that allow for such reduction. This development highlights the additional potential risks to the liquidity and funding of MFIs in the near term, arising out of contagion effect if other banks also initiate similar steps.
Timely debt servicing remains a key determinant of the rating for CRISIL. If there is any change in the repayment schedule as per the terms of the loan agreement, CRISIL will expect the revised repayment schedule to be adhered to. Some MFIs may explore appropriate redressal avenues, such as approaching a banking ombudsman, or seeking legal recourse. If there are any disputes, CRISIL expects the borrower to continue to honour its commitments to the lenders by servicing debt in a timely manner as per the revised repayment schedule, until the dispute is resolved.
Therefore, should an MFI default on the revised repayment schedule, CRISIL will consider moving its rating to default category. This is in line with Securities and Exchange Board of India’s (SEBI) guidelines, which require credit rating agencies to recognise default at the first instance of delay in servicing interest or principal on the rated debt instrument.