After loan-default related suicides in Andhra Pradesh brought microfinance institutions (MFIs) in the country a barrage of bad-press, financial sector rating agency, Crisil downgraded 12 MFIs from its earlier listings.

Crisil has put the MFIs on its ‘Rating Watch with Negative Implications’. “Six of these MFIs have ratings that are in the ‘BB’ category or below,” a Crisil press release said.

Some of the MFIs which have been thus panned by the rating agency include SKS Microfinance Ltd, Asmitha Microfin Ltd, Bharatiya Samruddhi Finance Ltd, Equitas Micro Finance India Pvt. Ltd, Grameen Financial Services Pvt. Ltd, Spandana Sphoorty Financial Ltd and Ujjivan Financial Services Pvt. Ltd.

It also took special note of Andhra Pradesh government’s recent ordinance in its release. “The Andhra ordinance has been highly unfavourable for the industry resulting in a precipitous drop in the collection efficiency and profitability of MFIs, especially those operating in Andhra,” Crisil said.

“Collections in Andhra have plummeted below 20 per cent, from nearly 99 per cent prior to the ordinance, with MFIs finding it difficult to make contact with borrower groups, and having to move to a monthly repayment cycle in line with the ordinance.”

MFIs have done well in Andhra Pradesh. However, with over 50 loan-default suicides, the sector's image took a beating with many questioning if MFIs stayed true to their social objectives. C Rangarajan, chairperson of the prime minister's economic advisory council, had earlier said that there was a need to regulated the sector as most MFIs were straying from creating financial inclusion, focussing on profits instead.

Crisil also suggested reforms in the functioning of MFIs. “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,” it said.

"Damage to microfinance industry can affect credit-flow to rural poor," it noted.

Read the press release