Securitization portfolio of microfinance industry plummets in Q3 due to note ban

Microfinance companies raised merely Rs726 crore through the sale of asset-backed securities in the third quarter compared to Rs3,498 crore in the September quarter


Demonetisation disrupted the microfinance business in the months of November and December. Photo: Hemant Mishra/Mint
Demonetisation disrupted the microfinance business in the months of November and December. Photo: Hemant Mishra/Mint

Mumbai: The cash-intensive microfinance industry’s securitisation portfolio plummeted in the quarter ended December because of demonetisation, according to a report released on Thursday by Microfinance Institutions Network (MFIN).

Microfinance companies raised merely Rs.726 crore through the sale of asset-backed securities in the third quarter compared to Rs.3,498 crore in the September quarter. Rs.1830 crore was securitized in the third quarter last year.

Securitisation is a process under which a lender bundles loans together and sell them to another financial institution, freeing up capital. The risk of the loan is transferred to the buyer in the process. Financial institutions such as banks buy these portfolios in order to meet their priority sector lending norms.

Loan pools can be securitized two ways—direct assignment or through issuing pass-through certificates (PTC). Direct assignment involves directly transferring a bunch of loans to the buyer. In a PTC, the certificates are issued through a special purpose vehicle (SPV) and could carry an implicit guarantee by the SPV.

“Securitisation volumes have reduced for microfinance segment on account of the impact of demonetisation. We are already seeing a pickup in Direct Assignments. PTC volumes may take some more time to pick up as investors (like mutual funds) wait for collections trends to stabilize,” said Krishnan Sitaraman, senior director, financial sector ratings and structured finance ratings, at Crisil Ratings.

Housing and loan against property, commercial finance, small business loans form major part of securitization volume apart from microfinance. Total securitisation portfolio of microfinance industry for the financial year 2016 stood at Rs11,500 crore, according to Crisil estimates.

Demonetisation disrupted the microfinance business in the months of November and December. Local leaders in parts of Maharashtra, Uttar Pradesh, Madhya Pradesh and Kerala were telling people that their loans have been waived, taking benefit of the situation. Repayment rates dropped to 30-40% in many areas in November.

“Since there was no customer acquisition in latter half of the quarter, securitized portfolio was nil. On an average we do securitisation worth Rs.50 crore every quarter. In the coming quarter too, we will not do any securitisation because demand is not there,” said Anup Kumar Singh, director of Sonata Finance Pvt. Ltd, an Uttar Pradesh-based microfinance lender.

Portfolio at risk for 30 days has increased considerably from 0.5% in the previous quarters to 7.52% in the quarter three of the current financial year, according to MFIN report.

“The moment disbursement picks up, securitization will also pick up. In the December-ended quarter we didn’t securitize anything because of demonetisation. Yearly we securitize 25-30% of our portfolio, which is roughly around Rs.900 crore. We expect normalcy in securitization volume by first quarter of the next fiscal year,” said H.P. Singh, chairman of Satin Creditcare Network Ltd.

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