Rating agency Crisil has placed debt instruments of 12 microfinance institutions, including SKS Microfinance, under rating watch which could adversely impact their future gradings, as an ordinance issued by Andhra Pradesh can damage their business models.

Half of the 12 microfinance institutions (MFIs) mentioned by Crisil have currently a rating of below ‘BB’, which signifies inadequate safety.

“Crisil has placed its outstanding ratings on the debt instruments of 12 microfinance institutions (MFIs) on ‘Rating Watch with Negative Implications’…Crisil will actively monitor developments in the sector and take appropriate rating actions,” it said in a statement on Monday.

Besides SKS Microfinance, other MFIs on Crisil’s list include Asmitha Microfin, Bhartiya Samruddhi Finance, Digamber Capfin, Equitas Micro Finance India, Grameen Financial Services, Sanghamithra Rural Financial Services and Shri Kshetra Dharmasthala Rural Development Project.

Crisil’s action comes at a time when Andhra Pradesh government has promulgated an ordinance to rein in microfinance institutions, after reports of large number suicides allegedly due to strong-arm tactics used by these micro lenders.

SKS Microfinance came into focus last week after stating that its collections from Andhra Pradesh for November has been below normal and a continuation of the situation would impact the future profitability.

It, however, changed tack a day later and said its strong balance sheet and funds availability will help it weather the crisis of business slow down faced by the sector after the Andhra Pradesh ordinance.

Since MFIs do not have direct access to deposits, they take loans from banks and others to re-lend them to those in the unorganised sector.

They have been accused of charging exorbitant rates of interest, of up to 36 percent, which was also blamed for high suicide cases in Andhra Pradesh.

“The implementation of the Andhra Pradesh ordinance has triggered a chain of events that can permanently damage the business models of MFIs, by impairing their growth, asset quality, profitability, and capital-raising ability,” it said.

It said that the estimated Rs 25,000 crore microfinance industry plays an important role in extending formal financial services to 2.8 crore of India’s under-served rural poor.

“…with the decline of the sector, the flow of credit to this segment of the population will be curtailed,” it said.

Terming the Andhra Pradesh ordinance as unfavourable, it said the measure has led to a drop in the collection efficiency and profitability of MFIs.

“Collections in Andhra have plummeted below 20 per cent, from nearly 99 per cent prior to the ordinance, with MFIs finding it difficult to make contact with borrower groups, and having to move to a monthly repayment cycle in line with the ordinance. Fresh disbursements in Andhra have been negligible over the past few weeks,” the statement said.