Credit Rating of Mfis

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Credit Rating of MFIs By..

Tanvi Thacker

Credit Rating
 An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.  Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default.

What is a rating of MFI?


A standardized tool to enable investors mainly lenders and donors to understand the risk profile and credit-worthiness of microbanks/MFIs both in absolute terms and in relation to other similar institutions estimate the absorptive capacity of MFIs and estimate the risk associated with lending to each institution the Social Rating provides feedback on the MFIs ability to achieve the impact it seeks

Why commission a rating?


A combination of a number of possibilities Investors/lenders decisions are facilitated as the rating serves as a significant part of appraisal/due diligence process MFI is able to approach investors with an independent assessment - if it has commissioned the report directly & further the rating identifies MFI strengths and weaknesses enabling Initiatives by the MFI to improve performance with own resources or donor support

The Rating Model

The working hypothesis is that The risk profile and creditworthiness of an MFI depends critically on its financial performance, but the risk associated with its future performance is crucially determined by its managerial capabilities and governance

Rating instrument of M-CRIL(micro Credit rating international ltd.)


1 Governance & strategy determines continuity, transparency, ability to grow & work within cost parameters, minimise risk 2 Management assesses HR policies, MIS, internal controls, tracking and follow up of overdues overall risk management 3 Financial performance comments on the portfolio quality and current and historical profitability/sustainability of the MFI includes PER, RoA as the key factors

Rating Methodology
at M-CRIL at the MFI

Scheduling Start-up - discussion with head of operations - head office data collection Field visit - branch visits & data collection - MIS verification - client interaction Follow up & de-briefing - discussion of preliminary analysis - filling data gaps

Rating Methodologycontinued

at M-CRIL

Data analysis & report writing Draft report to MFI - for feedback - report revision based on feedback Review by Rating Committee - MFI views presented alongside - final decision on grade & recommendation Report finalised and submitted to client

M-CRILs rating grades


E++(+) E+ E EF+ F
Highest safety, very good systems most highly recommended Very high safety, good systems highly recommended High safety, good systems highly recommended Reasonable safety, good systems recommended Reasonable safety, reasonable systems recommended, needs monitoring Moderate safety, moderate systems acceptable needs improvement to handle large volumes

M-CRILs rating grades continued


F K K
Significant risk, poor to moderate systems acceptable only after improvement Substantial risk, poor systems needs considerable improvement Highest risk, poor systems not worth considering

Grade distribution
45 40 35 30 24 25 20 15 10 5 0 K K
163 MFIs
Credit-worthiness threshold

40

28 24

17 14 10 6

F

F

E

E

M-CRILs record of pioneering products


 Credit rating: M-CRIL pioneered the introduction of credit rating (rather than performance assessment) of MFIs.  Quarterly monitoring: M-CRIL undertakes quarterly monitoring and semi-annual desk reviews of MFI performance when specifically contracted for this purpose.  Social Rating: M-CRIL has introduced social rating to assess and compare the social performance of MFIs. M-CRIL is the world-wide pioneer of this product as a rating product, launched in 2005.  Sector Studies and Reviews: M-CRIL also undertakes studies of issues in the performance of the microfinance sector in its countries of operation. Such studies have covered aspects like microfinance policy, best practices in MF delivery, micro-insurance and the microfinance market in a number of countries

M-CRILs progress
 M-CRIL has undertaken ratings/assessments/sectoral research studies in 18 countries:

Afghanistan, Azerbaijan, Kazakhstan, Georgia, Bangladesh, Cambodia, East Timor, India, Indonesia, Myanmar, Nepal, Pakistan, Papua New Guinea, Philippines, Samoa, Sri Lanka, Tajikistan, Vietnam.

M-CRILs clients
Asian Development Bank Blue Orchard Finance Cordaid, Netherlands Dept. for International Development, UK Ford Foundation HIVOS MISFA(Micro Finance Investment Support Facility) Afghanistan Small Industries Development Bank of India Swiss Agency for Development & Cooperation The World Bank UNOPS

Conclusion
M-CRILs experience is that institutional assessments based on accepted standards can be a very powerful tool in enabling capitalisation of MFIs, as well as in promoting institutional capacity building through the systematic identification of operational strengths and weaknesses

Thank you

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