The structured finance approach has given MFIs access to a new class of debt investors, thereby reducing over-dependence on traditional sources of funds. This therefore enables risk transfer over a larger gamut of financial institutions and also provides access to mainstream capital market investors. The need for continuous and reliable sources of capital is critical for growth and sustenance in this sector.
Kshama Fernandes of IFMR Capital has recently written an article “A structured finance approach to microfinance” that was published in Securitisation & Structured Finance Handbook 2011/12 by Euromoney Yearbooks, where she explains the structured finance approach to the microfinance asset class in great detail.
“The success and sustainability of the structured finance approach in the microfinance sector depends on the high-quality origination of loans, appropriate incentives for all parties to a transaction and continuous monitoring of the portfolio and originator. Transparency and adequate disclosures ensure that market players act responsibly and the best originators are recognised. Finally, a strong regulatory framework that promotes innovation while ensuring transparent reporting, sufficient accounting mechanisms, prudent exposure limits and effective risk management is critical.”
With lucid explanantions and vivid examples of single originator and multi-originator securitisations, the article is a must read for anyone interested in microfinance.
Click here to download the complete article.
2 Responses
IFMR’s parent ICICI Bank was the pioneer in securitisation of MFI loans in India with the first bundle of loans of SHARE Microfin way back in 2004-05. In the aftermath of the sub-prime loans in US, securitisation of MFI loans is no more the favourite approach to lending. In this connection, I quote Mrs Shymala Gopinath, then DG, RBI, when addressing the delegates of Indian Securitisation Summit in Aug 2010, “From a regulatory perspective, the real issue is that of regulatory arbitrage. While there is nothing wrong in direct sale of loans, banks should appreciate that if these transactions are being done to avoid restrictions on profit booking and higher capital requirements for credit enhancements, RBI would have concerns. As a prudent practice, banks should apply regulatory instructions according to the substance of transaction rather than form”. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=516It is not clear as to how the securitisation will help the problems of MFIs who have strong exposure in AP where the repayment of loans to them is reportedly below 10%. If the repayments are not forthcoming, where is the recourse for the IFMR Trust Pioneer II as the receiver of fortnightly payouts from the SPV operated by the Trustee (Exhibit -3 of the paper).While it is necessary to improve the system of lending procedures to micro-loanees, we can not abandon the conventional wisdom of basing credit decisions on sound banking practices.
The above approach talks about securitization as a means of providing access to a larger investor base thus enabling MFIs to diversify their sources of funding across entities and across time. Securitisation is no panacea. It is not a replacement for sound credit decisions nor a remedy for low quality origination and operations. As I said in the article, the success and sustainability of the structured finance approach in the microfinance sector depends on the high-quality origination of loans, appropriate incentives for all parties to a transaction and continuous monitoring of the portfolio and originator.