Mumbai: Microfinance institutions (MFIs), scrambling for money after banks stopped funding the ailing sector, are increasingly tapping the securitized loan market to raise resources despite transaction costs having become higher.
Securitization is the process of pooling loans and turning them into marketable securities that can be sold to investors.
MFIs are in the business of giving small loans to poor borrowers. They get money from banks at 10-12% and lend at nearly double the rate, generally for a period of one year.
Traditionally, MFIs engaged in such transactions in the final quarter of the fiscal year, though this year they have been forced to do so at the beginning of the fiscal due to a shortage of cash. There have been at least three major securitization transactions worth around Rs 100 core involving leading MFIs.
This includes SKS Microfinance Ltd that sold Rs 50 crore of loans to private sector lender Yes Bank Ltd, a Rs 30 crore deal by Delhi-based Satin Creditcare Network Ltd and a Rs 17 crore transaction by Bangalore-based Ujjivan Financial Services Ltd.
“Since banks have been highly cautious, the loan flow to the sector has virtually come to a halt. Due to this, MFIs are now going for securitization instead of term loans, even though they have to give a higher yield,” said Ravikumar Dasari, manager, NBFC division, with rating agency Care Ltd.
According to Ravikumar, two-three more securitization transactions are in the pipeline in the next one-and-a-half months. “More deals are likely to happen throughout the year until banks open the channels,” Ravikumar said.
Banks invest in such papers to meet their priority sector requirements. Under this, 40% of bank loans should be made to agriculture, exporters and other weaker sections.
If they fall short, banks typically buy the securitized loan portfolios of MFIs.
The Rs 22,500 crore microlending industry plunged into crisis in October last year, when Andhra Pradesh introduced an ordinance and then a law to regulate the institutions. This caused a fall in debt collection rates to 10-15% and forced the MFIs to stop fresh loan disbursals.
Andhra Pradesh accounts for a quarter of the microlending industry, has around 10 million borrowers, and is home to some of the largest MFIs, including the largest and only listed firm, SKS Microfinance, Spandana Sphoorty Financial Ltd and Share Microfin Ltd.
Due to the uncertainty, banks, too, stopped lending to these firms on account of a sharp deterioration of the asset quality of microlenders.
Industry officials said the cost of securitization transactions have gone up for MFIs this year due to the adverse market scenario.
Typically, during such transactions, MFIs used to pay 10% to banks, which invested in their books. However, according to senior industry officials, the rates have gone up to 12-12.5% due to the changed market scenario.
“Earlier, banks really needed these assets to meet their priority sector lending targets, but with the risk associated with these loans increasing and a simultaneous hike in the bank’s base rate in the same period, they are demanding a higher return,” said Padmaja Reddy, managing director of Spandana Sphoorty.
Reddy said Spandana sold securitized loans amounting to Rs 1,800 crore over the last fiscal, till the crisis broke out in October. He said the current crisis had weakened the bargaining power of MFIs with respect to negotiating securitization rates with banks.
Banks are now demanding around 2 percentage points more than the rates at which securitized portfolios were bought in earlier years, said Chandra Shekhar Ghosh, managing director of Bandhan Financial Services Pvt. Ltd.
“Money is needed in this sector at the moment and there is a sizeable non-Andhra Pradesh portfolio that can be securitized to generate cash flow,” Ghosh said.
In March, Bandhan securitized loans worth Rs 410 crore and sold them to banks such as IDBI Bank Ltd, Axis Bank Ltd, HDFC Bank Ltd, and Development Credit Bank Ltd. The firm has not securitized any other loans this fiscal.
Securitized transactions in the microlending industry fell to one fourth in fiscal 2011 due to the ripple effect of the microfinance crisis that started in Andhra Pradesh in October.
According to Sa-Dhan, an association of microlenders, the total volume of microfinance securitization deals in last fiscal fell to Rs 1,100 crore from around Rs 4,000 crore in fiscal 2010.
“This is an alternative channel to MFIs now. My sense is that you will see more financial innovation happening on securitization,” said Mathew Titus, executive director of Sa-Dhan, adding that the cost of such deals have gone up as a function of the environment.
The adverse market scenario has also visibly weakened the ability of Andhra Pradesh-based MFIs to engage in securitized transactions.
For instance, MFIs such as Spandana Sphoorty, with a majority of its loan portfolio in the state, haven’t been able to securitize and sell any further portion of its book.
“We do not have any non-hypothecated portfolio on our books to securitize,” Reddy said, adding that current regulations permit MFIs to securitize only loans that have been given out of their own net worth.
While banks typically buy such loans towards the latter half of the year to meet priority sector norms, investors buying such assets at the moment were more concerned with securing returns by investing in good quality assets, said Bindu Ananth, president, IFMR Trust.
“Apart from banks, there have been some mutual funds and private wealth management entities that have also bought securitized loans from MFIs,” Ananth said. “These investors do not follow any particular cycle and buy through the year, as long as the underlying asset is robust. One can expect more such transactions moving ahead.”
Recently, the Reserve Bank of India (RBI) had spelt out regulations for MFIs incorporated as non-banking financial companies based on the recommendations of an expert panel under Y.H. Malegam. The apex bank capped the lending rates MFIs can charge to customers at 26% and said any loan above Rs 15,000 should have a minimum maturity of two years.
RBI also allowed banks to restructure around Rs 5,000 crore of loans of five Andhra Pradesh-based MFIs without classifying them as substandard assets. Banks are currently discussing the proposal.