Will standards to measure MFIs go global?

The concept of having specialised rating methodologies for microfinance institutions MFIs, something envisaged merely a few years ago, is now fast gaining ground.

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 038; Poor8217;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. 8220;At current growth rates, a total of 50 large MFIs is nearly assured by the end of 2007,8221; 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 sector8217;s requirement of substantial funding.

8220;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,8221; he adds.

But given the wide differences between the stages of maturity of MFIs across the globe, would a universally applicable set of metrics be appropriate?

There is no really straight answer to this question and experts doubt such a possibility. Explains Choudhary: 8220;Given the very nature of this sector, a 8216;one size fits all8217; approach may not be a very good idea. While the broad methodology may be similar, we need to consider the specific characteristics of the particular region in which such ratings are being done.8221;

However, CRISIL head fund services 038; fixed income Krishnan Sitaraman feels that a globally acceptable set of rating rules becomes important since several international investors are looking at investing in MFIs in different parts of the world. A global metric system can help such investors compare and contrast MFIs in one region with those in another. 8220;We at CRISIL have been rating MFIs for almost five years and have found that their asset quality is, in fact, better than that of banks. Devising a scale to rate MFIs, which is acceptable to the investor market, will help these institutions attract investments,8221; concludes Sitaraman.