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Business News/ Industry / Banking/  MFIs may turn to securitization during their transit to small finance banks
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MFIs may turn to securitization during their transit to small finance banks

As SFBs, these microfinance institutions will have to bring down their level of borrowings from banks and increase fund-raising through deposits

Securitization is a process through which a lender can bundle loans together and sell them to another financial institution, thereby transferring the risk of the loan to the buyer. Photo: MintPremium
Securitization is a process through which a lender can bundle loans together and sell them to another financial institution, thereby transferring the risk of the loan to the buyer. Photo: Mint

Mumbai: Eight microfinance institutions (MFIs) that will soon turn into small finance banks (SFBs) may have to rely on securitization for freeing up capital to cater to fresh loan demand as they begin to meet a new set of rules by the Reserve Bank of India (RBI).

Securitization is a process through which a lender can bundle loans together and sell them to another financial institution, thereby transferring the risk of the loan to the buyer. The aim is to free up capital.

Securitization is done either through direct assignment of loans or through pass-through certificates (PTC) which have loans as underlying. These are tradable instruments.

The RBI gave in-principle licence to 10 entities to set up SFBs in September 2015, out of which eight are MFIs. Disha Microfin, Equitas Holdings, Ujjivan Financial Services and Janalakshmi Financial Services are among these eight players.

Once these MFIs turn into SFBs, they will have to follow a slew of rules that do not apply to them currently. For instance, as SFBs, they will have to keep a portion of their deposits with the RBI under cash reserve ratio (CRR) and invest a slice of deposits in government securities under statutory liquidity ratio (SLR).

“A lot of increase in securitization will be seen for these SFBs as they have to meet CRR and SLR norms. Securitization will be an off balance sheet financing," said Sudha Suresh, chief financial officer of Ujjivan Financial Services.

As SFBs, these microfinance institutions will also have to bring down their level of borrowings from banks and increase fund-raising through deposits as the RBI caps borrowings between banks. MFIs are not allowed to take deposits and so have to rely on bank borrowings to meet demand for loans from small individuals in rural areas.

“Small finance bank will see an increase in the securitization to manage their balance sheets since they have to redraw their liabilities from bank-led liability model to deposit-led liability model. As an NBFC (non-banking finance company), there is no regulatory limit on bank borrowing, but once we start with banking operations, we have to limit our bank borrowing and replace it with deposits," said Rajeev Yadav, chief executive officer of Disha Microfin.

While bringing down bank borrowing would be quick, getting fresh deposits to fill up this gap is a tall order. As MFIs make this transition from sourcing bank funds to raising money through deposits, they will need to find a bridge in the meantime to meet incremental loan demand and securitization would be an option.

“Because of the cap on inter-bank liabilities and the time required to scale up their retail liability franchise, SFBs may continue to rely on funds through securitization to support growth," said Krishnan Sitaraman, senior director at Crisil Ratings.

The rating firm sees this as one of the main factors that would influence the volume of securitization transactions. Kartik Srinivasan, senior vice-president at ICRA, believes that there is enough demand from banks to invest in such securitized loan pools which would help these SFBs to sell them. “The size of small finance banks compared to the banking industry is way small. Time will tell how much they would rely on securitization but this would be an important avenue. Banks will target SFBs to meet their PSL (priority sector lending) targets, which are reviewed quarterly from now onwards," said Srinivasan.

Analysts also said that the size of such securitization transactions would be small.

MFIs have led the growth in the volume of securitization in India over the past two years. A report dated 14 June by Crisil Ratings said that the volume of securitized loans was at an eight-year high of 70,000 crore in fiscal 2016. MFIs contributed 17% of this and the eight MFIs that would turn into SFBs contributed 40% of the total MFI securitization volume.

The buyers of securitization have been banks and large NBFCs that seek to meet their priority sector lending target.

The preferred route to securitize would be PTCs, according to Disha Microfin’s Yadav. In fiscal 2016, a little over 80% of the total securitization portfolio of MFIs was through PTCs, according to Crisil Ratings.

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Published: 18 Jul 2016, 12:34 PM IST
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