COVID-19-hit microlenders knock on SEBI’s door seeking extension of rating period

Microfinance institutions (MFIs) have sent a distress call to markets regulator, the Securities and Exchange Board of India (SEBI), seeking to instruct credit rating agencies to delay the ratings on microlenders whose operations have been disrupted by the impact of COVID-19. Rating agencies typically revise ratings of microlenders after 12 months. This time, microlenders want an extension of three months to this period. In the absence of this, ratings will not reflect the correct financial position of MFIs, microlenders fear.

Despite the lockdown, some of the microlenders have started to get communication from agencies  on further rating revision, said P Satish, Executive Director of Microfinance body, Sa-Dhan.“It is necessary that rating agencies should wait for the situation to normalise in the country and normal economic activities to resume before giving a fresh rating to MFIs,” Sa-Dhan wrote in a letter to SEBI. Moneycontrol has reviewed the letter.

“The most appropriate course of action at this juncture would be to extend the existing rating period from 12 to 15 months, so that fresh assessment can be done and renewed rating can be assigned after the normal operations resume in microfinance sector,” MFIs said. As on January 31, the loan portfolio of MFIs stood at Rs 90,413 crore. The repayment rate, which is typically more than 98 percent, fell due to the COVID-19 lockdown.

While MFIs have announced repayment moratorium for their clients, banks haven’t extended the same to many NBFCs and MFIs.

“Though the Government has allowed MFIs to function in a limited manner, the ground level situation is not conducive for regular functioning. MFIs are unable to complete the annual closing of accounts related work and take up the audit,” Microlenders have said in the letter.

MFIs allege that even without sufficient data some rating agencies are seeking to give fresh rating to MFIs based on incomplete and insufficient information and absence of field assessment. Any such fresh rating would, therefore, be erroneous and incorrect.  Ratings are critical for a company since lenders consider this to decide the creditworthiness of the borrower.

MFIs operate in the form of non-banking finance companies (NBFCs) and non-NBFCs. There are about 66 NBFC-MFIs under Sa-Dhan. These lenders have found it difficult to access funds under the special liquidity window of the RBI due to banks’ high risk aversion. Much of the funds under the targeted long term repo operation (TLTRO) availed by banks went to big companies. Though the RBI allocated Rs 15,000 crore to on-lend to MFIs and small firms, stringent conditions laid out in the scheme agreement made it difficult for MFIs to access this money. These include BBB-rating requirement and 90-day repayment condition. MFIs have sought relaxation of lending terms from Small Industries Development Bank of India.