MICROCAPITAL BRIEF: Fitch Ratings Stresses Importance of Single Regulator for Indian Microfinance Sector

Multiple Indian newspapers have cited an unnamed report on Indian microfinance regulation from global ratings agency Fitch that reportedly states that a single regulatory body is crucial to ensuring a stable Indian microfinance sector and that future legislation affecting microfinance should be developed through cooperative efforts between state and federal authorities. Fitch argues that the benefits of a single regulator include clear rules and consistent expectations for all microfinance institutions (MFIs), as well as increased comfort for investors [1]. Indian banking officials have previously expressed their support for a single regulator system [2].

Ananda Bhoumik, Senior Director of Financial Institutions at Fitch Ratings, is quoted as having said, “The experience of co-operative banks in India suggests that multiple regulators may not be as effective as a single strong regulator and may also make it difficult for MFIs to comply with different sets of guidelines” [1].

The report is also said to predict consolidation in the industry because smaller institutions may not be able to comply with margin caps or loan loss provisioning. India’s microfinance sector is composed of diverse institutions in different environments, with some states highly saturated by large MFIs while other states are served by just a few small MFIs. Currently, the Indian MFI sector has a “BBB (ind)” rating from Fitch, reflecting ongoing risks as well as robust repayment rates [3]. This is despite the drop in repayment rates in Andhra Pradesh that has accompanied a cascade of problems in microfinance in the region since 2010.

By Rohan Trivedi, Research Associate

Sources and Additional Resources:

[1] The Economic Times: “Microfinance companies needs [sic] stable regulation to survive: Fitch”, http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/microfinance-companies-needs-stable-regulation-to-survive-fitch/articleshow/8104792.cms

[2] MicroCapital.org story, March 23, 2011: “MICROCAPITAL BRIEF: Bankers Urge Reserve Bank of India’s (RBI’s) Malegam Committee to Maintain Priority Status for Microfinance Sector”, https://www.microcapital.org/microcapital-brief-bankers-urge-reserve-bank-of-india?s-rbi?s-malegam-committee-to-maintain-priority-status-for-microfinance-sector/

[3] Business Standard: “Stable regulatory environment key to Indian MFI revival: Fitch”, http://www.business-standard.com/india/news/stable-regulatory-environment-key-to-indian-mfi-revival-fitch/133260/on

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