IIM Ahmedabad recently interviewed Bindu Ananth and Nachiket Mor for their publication ‘The Efficient Frontier’. The publication was recently rebranded to mark the institute’s Golden Jubilee year.

In this interview, Bindu Ananth and Nachiket Mor discuss the applications of financial engineering to low income  households.

Excerpt from the interview

In your experience with low income households, what are some of the risks which you have seen them facing and which you feel could be solved by financial engineering? What are some of the products that can be used to mitigate these risks?

For most low-income households – human capital, in the sense of present value of lifetime net incomes, tends to be the biggest asset in their portfolio. Given fairly low levels of financial capital/wealth, the reliance on human capital is very high in order to successfully meet household goals over a period of time. Anything that impacts this human capital then tends to become very critical for these households….

Click here to download the publication.

IFMR Capital recently structured and arranged two Microloan Securitisation transactions – Aether IFMR Capital 2011 involving a single originator Grameen Financial Services Private Limited (Grameen Koota) and MOSEC 7, a multi-originator securitisation transaction involving seven Non-Banking Finance Companies.

Mosec 7

On September 7 2011, IFMR Capital concluded a Rs. 511 million multi-originator microloan securitisation backed by 49,881 microloans originated by seven Non-Banking Finance Company (NBFC)-Micro Finance Institutions (MFI), namely Asirvad Microfinance Private Limited, Disha Microfin Pvt. Ltd, Mimoza Enterprises Finance Pvt. Ltd., Satin Creditcare Network Limited , Suryoday Micro Finance Pvt. Limited, SV Creditline Private Limited and Utkarsh Micro Finance Private Limited. IFMR Capital Mosec VII, the SPV, issued two tranches of securities rated by ICRA: 85% senior tranche rated A1-LBBB+ (SO) and Series A2-Unrated.

The senior tranche has been subscribed by a Bank and HNI’s and Junior Tranche by IFMR Capital.

This is the biggest Multi Originator transaction arranged and structured by IFMR Capital involving 7 high quality Originators.

The structure created by IFMR Capital ensures that the incentives of the originator, servicer and the structurer are aligned. While the originators and servicers, provides cash collateral as first loss, the structurer, IFMR Capital, has invested in the subordinated junior tranche. The cash collateral and the subordination of payments to junior tranche in the waterfall mechanism ensure that the senior investor is protected against losses and any first loss is borne by the originators and the second loss by the structurer.

Aether IFMR Capital 2011

The Rs. 239 million single-originator securitisation transaction was completed with Grameen Financial Services Private Ltd also popularly known as Grameen Koota. Aether IFMR Capital 2011, the SPV, issued two tranches of securities backed by 23,108 microloans that were originated by Grameen Koota. Non-Banking Financial Institutions subscribed to the senior ICRA A- rated tranche and IFMR Capital invested in the subordinated ICRA BB+ rated piece.

This is the eighth capital market transaction for Grameen Koota with IFMR Capital.

The originator and servicer, Grameen Koota, provides cash collateral of 10% of the pool principal, while the structurer, IFMR Capital, has invested in the subordinated junior tranche. As in the above transaction, the waterfall mechanism ensures that here, the senior investor is protected against losses up to Rs. 240 million and any first loss is borne by the originator and the second loss by the structurer.

The first IFMR Conference on Financial Systems Design was held at our office in Chennai on Aug 5-6, 2011. The objective of the conference was to engage in an in-depth conversation on the future of the Indian financial system and some of the underlying design challenges being faced in various markets.

In order to retain a functional perspective, the conference was organised into three main sessions for discussion — Origination, Transmission and Aggregation — as three broad buckets of questions and concerns – one involving customers and customer protection issues, the other involving markets and derivatives and the third involving large, nationally important financial institutions and systemic risk concerns.

In the introductory session, Nachiket shared some of his thoughts on the Indian financial system.

The format of the conference allowed for collaborative work and visioning by the participants. Following a lead presentation for each of the main sessions that identified key themes, each table came up with vision statements for that theme which were then shared across the room and discussed. Following the visioning, there was an exercise to identify the pathways for us to get to the desired end-state. These pathways were categorised into Research, Regulation, Innovation and Public Infrastructure.

The conference yielded very rich discussions and the participants identified several interesting issues and priorities for the Indian financial system. In the following weeks, we will share the summary of discussions and identified pathways for each of the three sessions.

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.

- By Dr Ajay Shah, National Institute of Public Finance and Policy. [As posted on Ajay Shah's blog]

In February 2010, I had the opportunity to visit Pudhuaaru KGFS in Thanjavur. This is a remarkable project which helps us see the interface between households and the financial system in a wholly new light.

What a difference 17 months makes! On that visit, I had found a little tenuous Reliance CDMA cover at one place in Thanjavur city. On this visit, I found 3g or Edge cover in many remote places. On that visit, the ride from the airport at Tiruchirapalli to Thanjavur took two hours. This time, it got done in 30 minutes on the new NHAI road, with a peak velocity of 110 kph. While there are many reasons to be gloomy about the problems that India faces, some things are moving along merrily.

The KGFS approach to households and finance

KGFS emphasises the very important idea that for households to correctly engage with the financial system, this relationship must be (a) rooted in high quality advice, (b) which is grounded in a state of strong information about the household…click here to read more