Fitch Ratings-Mumbai/Singapore-16 November 2010: Fitch Ratings has today published a special report highlighting risks in microfinance securitisations. The report provides an insight into key risk factors in these transactions such as a high dependence on servicers, limited historical asset performance information as well as an evolving regulatory and legislative framework that could lead to unenforceability of underlying loans. In the absence of suitable mitigants to such risks, these transactions are unlikely to receive the highest Long- or Short-term ratings.

"The intricate servicing arrangements, coupled with a lack of institutional back-up collection mechanisms, make the rating of microfinance securitisations to be inextricably linked to that of the originator/servicer. In the absence of suitable mitigants with respect to such counterparties, Fitch will link the rating of the transactions to the rating of the originator/servicer" says Deep N Mukherjee, Director, Structured Finance.

The rapid growth of the microfinance institution (MFI) industry and its ability to affect the lives of a vast number of people have increasingly drawn the scrutiny of the Indian regulators. Regulatory change is difficult to quantify, and as such to include in ratings assessments. "While Fitch cannot anticipate regulatory change, the current uncertainly surrounding the regulatory environment would make it difficult to assign 'AAA(ind)(SO)'/'F1+(ind)(SO)' ratings to microfinance securitisations", says Sandeep Singh, Senior Director, Structured Finance.

To date, Fitch has not assigned any ratings to Indian Microfinance securitisations. "When presented with micro-finance securitisations, the agency will strive to bring to investors key mitigants that would result in the notching up of the instrument rating from the Issuer Default Rating of the originator. These mitigants could range from superior marginal pool being securitised compared to the overall portfolio of the originator to high quality of data which addresses analytical and credit concerns as well as mitigants to reduce dependence on servicer", added Mr. Singh.

Fitch expects the MFI market - and more specifically, the MFI securitisation market - to mature over the long-term, with the creation of systems and structures that would enable the market to grow in a sustainable manner. Anticipated developments include the use of centralised credit bureaus to deal with cross-indebtedness, the growth of third-party servicing platforms (allowing securitisations to detach themselves from the credit of the originator/servicer) and regulatory changes (leading to consistent and widely accepted lending practises by microfinance lenders).

The report, "Indian Microfinance Securitisations: Ratings constrained by unmitigated risks' is available on www.fitchindia.com and www.fitchratings.com or by clicking on the link above.