India: More MFIs Securitising Loans to Raise Funds

Mar 2009
Mumbai, India, March, 16 2009 - Micro finance institutions are increasingly looking at the securitisation route to cut borrowing costs and to free up capital. For investors, the asset pools are safe as they are backed by cash flows, thanks to the high recovery ratio of MFIs.

Besides, with rating agencies now rating these structured instruments, the trend is really catching on, said experts.

In a securitisation deal, pools of assets such as auto loans, personal and construction loans are pooled together and hived into special investment vehicles, which are bought by investors.

Rating agency Crisil, which recently rated and securitised India’s first micro finance loan receivables, backed up Equitas Micro Finance, is ready with one more rating, said Mr Raman Uberoi, Senior Director, Crisil. “As MFIs grow they need to look at alternate sources of funding. For the better MFIs, with strong asset quality, no high delinquencies and a strong underlying cash flow, the loans are pretty amenable to being structured and sold. It enables them to tap sources beyond bank lending and equity, which is what we have seen so far,” he said.

According to Mr Dilli Raj, Chief Financial Officer, SKS Microfinance, securitisation is a win-win situation for both MFIs and assignees (banks) or investors (mutual funds).

For MFIs, securitisation offers capital relief as it is off-balance funding. It also offers funding that is 100-150 basis points lower than term loans. For banks, it helps meet their lending targets in priority, agri and weaker sections.

These structured instruments typically have a short maturity term, of an average of six months. Therefore, mutual funds, which have short-term surpluses, would be interested as the yields are higher than other instruments with corresponding maturities such as government securities, bank certificates of deposits and corporate bonds, Mr Raj said.

Limited rural reach

Private banks are interested in buying loan receivables of MFIs due to their limited rural reach. But it has become an attractive proposition even for public sector banks, which could face higher defaults in their direct lending to the agri sector. “As MFIs boast of nearly 100 per cent collection efficiency and NPAs of less than 0.5 per cent, it makes more sense for banks to ride on the network of MFIs than directly lend on their own,” said a banking official.

As more institutional investors participate, the supply side of funds will improve, market will be more liquid and this will result in lowering of cost for MFIs, said Mr S. Bhaskar, COO, Equitas Micro Finance.

“While theoretically securitisation would free up capital, at current levels of credit enhancements there is limited benefit from this angle. At Equitas, we securitise to diversify funding sources than to free up capital. We maintain capital even for securitised assets,” he said.

So far, the MFI sector has not seen adequate portfolio exposure, which is why rating agencies were reluctant to rate them. But as more information and history about MFIs is available and as rating agencies begin to rate them, investor appetite will increase, Mr Bhaskar added.

SKS Microfinance has so far completed Rs 750 crore (USD 146 ml) worth of securitisation through eight bilateral deals, primarily with private banks, said Mr Raj. “By the end of this year, we may have another four deals and the total amount would be Rs 1,000 crore,” he said.


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