The concept of having specialised rating methodologies for microfinance institutions (MFIs), something envisaged merely a few years ago, is now fast gaining ground. As in case of other emerging trends, the need for a standard rating methodology is being increasingly felt. In a recent report, Standard & Poor’s Ratings Services has underlined this need while aiming to provide mainstream investors with a framework for making informed decisions in microfinance. The report Microfinance: Taking Root In The Global Capital Markets emphasises the need for devising globally consistent and acceptable metric standards for rating MFIs.

According to the study, there are currently about 40 MFIs with loan portfolios exceeding a total of $100 million and another 11 with $85 million or more. “At current growth rates, a total of 50 large MFIs is nearly assured by the end of 2007,” states the report.

However, for such growth, the microfinance sector needs large amounts of capital inflows, which are possible only if more investors become interested in it. A pre-requisite for encouraging and sustaining investor interest is informing the potential investor about the risks and benefits involved. A globally applicable system of ratings can help define the parameters of risk and reward and remove any asymmetry in information, thus enhancing investment in the sector. According to ICRA vice-chairman and group CEO P K Choudhary, a globally applicable rating methodology is relevant in the context of a relatively new microfinance sector’s requirement of substantial funding.

“Given the nature of lending in this sector, where the underlying borrowers are typically Joint Liability Groups (JLG) or Self Help Groups (SHG) rather than a single individual, as well as the systemic issues of unreliability and inadequacy of data facing the sector, rating metrics need to be designed to capture and rank the relative risks across borrowers,” he adds.

... contd.