MICROCAPITAL BRIEF: Daniel Rozas, Vinod Kothari Contrast Microfinance Securities Rating Methodologies Practiced by Rating Agencies CRISIL, Fitch

Daniel Rozas, a microfinance consultant based in Brussels, and Vinod Kothari, a microfinance practitioner based in Kolkata, India, recently wrote an article published on the Microfinance Focus website discussing the different rating methodologies practiced by rating agencies CRISIL and Fitch on securitized microfinance investment products.

The authors point out that Fitch, a rating agency headquartered in New York, currently links the rating of microfinance securities to its originator, unlike CRISIL, another rating agency based in India and owned by Standard and Poor’s. The article cites a security issued by Asmitha Microfin, an Indian microfinance institution (MFI), to argue that there is an inconsistency in CRISIL’s methodology. Asmitha Microfin received from CRISIL a BBB rating, which indicates that the MFI is judged to “offer moderate safety, with regard to timely payment of financial obligations for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rating categories.” On the other hand, a security issued by the same MFI received the highest possible rating of P1 (so), implying that the security “provide[s] very strong protection against losses from credit defaults” [3]. The authors point out that the uncertainty of the microfinance sector in Andhra Pradesh, where Asmitha Microfin is based, will likely have a negative impact on the repayment of loans related to the aforementioned security. They conclude that, “in this confusion of rating methodologies, we are of the view that Fitch is closer to the truth.”

About CRISIL:

CRISIL is a credit rating agency based in Bangalore, India, that operates internationally. It provides ratings for various microfinance institutions (MFIs), including approximately 30 that report to the MIX Market, the microfinance information clearinghouse. Some of these MFIs include Bandhan, BASIX, Cashpor Microcredit, Equitas, and Spandana. In October of 2009, CRISIL published a list entitled “Top 50 Microfinance Institutions in India.”

By Trevor Kwong, Research Assistant

Sources and Additional Resources:

[1] Microfinance Focus: Microfinance Securitization: Rating Confusion:

http://www.microfinancefocus.com/content/microfinance-securitization-ratings-confusion

[2] CRISIL: Credit Ratings: Scales:

http://www.crisil.com/ratings/credit-rating-scale.html

[3] CRISIL: Other Ratings: Scales:

http://www.crisil.com/ratings/other-rating-scales.html

[4] MicroCapital Universe: CRISIL:

https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CRISIL

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