Working Papers

Microfinance has emerged as a very important paradigm for meeting the credit requirements of poor people, who were until recently outside the coverage of formal banking institutions. But a lack of transparency in the microfinance sector and information asymmetry between microfinance institutions (MFIs) and lenders have made lenders apprehensive of lending to MFIs. MFI rating is designed to remove such constraints. There are around 16 rating agencies the world over. At present, in India only two agencies are involved in MFI rating, and between them most of the ratings are done by M-CRIL. These rating agencies adopt different methodologies, rating models, and rating scales for assessing the performance of client MFIs. This study examines the increasing importance of MFI ratings in the development of the microfinance sector. It looks at some of the popular rating agencies and their models, and does a comparative analysis of these. It also examines the feedback received from different stakeholders with respect to the ratings and the key challenges related to MFI rating.