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CRISIL puts India microfinance firms on negative watch    
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Source: Reuters

NEW DELHI/MUMBAI, Nov 22 (Reuters) - Indian rating agency CRISIL (CRSL.BO) on Monday put 12 microfinance institutions on a negative ratings watch, saying a recent ordinance in southern India was reducing profits and would make it harder for the firms to attract funds.

"The Andhra ordinance has been highly unfavourable for the industry resulting in a precipitous drop in the collection efficiency and profitability of MFIs, especially those operating in Andhra," CRISIL said in a note.

Andhra Pradesh recently enacted rules against aggressive recovery practices by lenders who make loans that average about $150 to poor customers at interest rates that can top 30 percent.

CRISIL said other states could soon follow suit.

"Fresh bank funding available to MFIs has materially reduced as of now," Pawan Agrawal, a director at CRISIL, an unit of Standard & Poors, told Reuters in an interview on Monday.

India's fast-growing, largely unregulated microfinance industry surged to prominence when George Soros-backed SKS Microfinance (SKSM.BO) raised $358 million in an initial public offering in August.

Last week, the founder of SKS, the only listed firm in the country, said the company had not seen any banks withdrawing support despite the clampdown, and that it continued to have a strong balance sheet. [ID:nBMA008904]

Agrawal said banks contribute up to 160 billion rupees of funding to MFIs in India. However, he said risk to Indian banks' non-performing loans from their exposure to MFIs is not material at this stage.

Banks' exposure to MFIs was "very small" in the context of their overall portfolio, he noted.

CAPITAL CRUNCH

Agrawal said recent developments would hurt plans of initial public offerings of other MFIs, some of whom have already delayed plans.

"Ability of MFIs to raise capital will (now) reduce," Agrawal said.

The government of the eastern state of Orissa said on Friday it would look into microfinance practices, joining Andhra Pradesh, which tightened rules last month. [ID:nBMA008907]

"Another risk is that other states may initiate state-level legislation similar to the Andhra ordinance...the MFI industry is exposed to the risk of changes in the political, legislative, and regulatory environment," CRISIL said in a note.

"This phase reflects the risks inherent in an emerging sector," Agrawal said.

India's Finance Minister Pranab Mukherjee weighed in last week on a debate pitting those who favour offering small loans to the poor against critics who accuse private companies of taking advantage of them and putting them in greater debt.

"My idea is not to strangulate it but to regulate," Mukherjee told a panel on Friday.

Microfinance loans can be as low as 2,000 rupees ($44) at interest rates that can top 30 percent. Borrowers use the cash for various ventures such as buying livestock or opening a tea stall.

The loans, which started out to fund small businesses among the poor, now extend to consumption, allowing people to buy refrigerators and send their children to school.

"The first thing to do is ride out the short-term challenges. Clarity on jurisdiction and framework of the regulatory environment is needed," Agrawal said. "Growth of the sector is going to be much more muted than what we have seen so far."

Agrawal did not rule out the possibility of smaller MFIs eventually filing for bankruptcy, and said consolidation among bigger players was not likely in the near term. (Reporting by Anurag Kotoky and Arjun Kashyap; Editing by Jui Chakravorty).

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