Structuring a Fund Platform for Financial Inclusion in India

In the latest edition of Securitisation & Structured Finance Handbook 2016/17 (published by Capital Markets Intelligence) Ravi Saraogi, IFMR Investments & Robin Tyagi, IFMR Capital, have authored a chapter on Structuring a Fund Platform for Financial Inclusion in India. The authors present the use of structured finance in designing a fund platform for greater capital market access for financial inclusion in India and highlight the potential that structured fund platforms have in attracting market participants to access the bond market.


This paper presents the design of a fund platform using principles of structured finance to enable greater capital market access for financial inclusion in India. A structured fund platform can tide over a tepid bilateral bond market and match the needs of investors and investees more efficiently. Central to the designing of a structured fund platform is quantifying the default risk in such structures. Accordingly, the paper specifically focuses on using the technique of Monte Carlo simulation to estimate risk. The results highlight the potential that structured fund platforms have in aligning disparate investor and investee needs. The paper has been divided into five sections. The first section gives an overview of the bond market in India. In the second section, we emphasise on the need for a structured finance approach to tide over frictions in capital markets. The third section provides the broad construct of the fund structure used in this paper to illustrate the methodology for risk estimation in fund structures. The fourth section gives an overview of the rating methodology used. The last section presents the output and concludes.

Click here to download the paper.


IFMR Capital: The Money Conductors

The latest edition of the Forbes India magazine features a cover story on IFMR Capital. The story traces the origins of IFMR Capital, its evolution over the years and how its work is translating into financial access for high-quality partner originators that it works with.


It is our mission to reach out to Indians who find it difficult to get a housing loan or a business loan because they are not part of the formal system. Banks and financial institutions that have the capital do not understand these segments. Our job is to bring in capital to originators who provide finance to informal sectors,” says Kshama Fernandes, managing director and CEO, IFMR Capital.

Over the last eight years, IFMR Capital has facilitated capital to the tune of around Rs 30,000 crore to 100-odd originators, serving 25 million end borrowers.

Read the article here.


The Power of Frustration

In a recent report by Wharton Social Impact Initiative & Knowledge@Wharton on Innovative Finance and the various forms it has taken, the report highlights among others, the multi-originator securitization (MOSEC) transaction that was first pioneered by IFMR Capital. Tracing the origins of MOSEC and how the idea, brought about by an underlying frustration at not being able to cater to small but high-quality originators, came into being. The article throws light on what has since been one of the key vehicles for IFMR Capital in its endeavour to enable capital access to partner originators that it works with.

From the article:

In June 2008, IFMR Capital, a non-bank financial company based in Chennai, India, had opened its doors with the express purpose of providing access to the financial markets to the millions of Indians who lacked it. But, the small- and medium-sized originators who were making loans to the population that IFMR Capital wanted to serve were constrained by the sizes of their businesses.

IFMR had been trying to persuade investors to buy some of the debt of these small microfinance institutions so they could make more loans. But investors were wary. They feared the risk from loans from a single small originator from just one area of the country that was possibly subject to the same natural disasters.

“They were very high quality originators, but they were very small. They were not ready to go to the capital markets,” says Mukherjee, who was CEO of IFMR Capital at the time and is now CEO of IFMR Holdings.

Finally, Mukherjee, deliberating with her colleagues, blurted out, “Why don’t we just pool?” What she was suggesting, securitizing the loans of small- and medium-sized microfinance institutions, originators with portfolios as small as $500,000, had never been tried.

In January 2010, a little more than a year after Mukherjee asked the question, IFMR issued its first multi-originator securitization (MOSEC, now trademarked), a $6.5 million issue bundling some 42,000 microloans, with an average size of $200, from four originators. To date, IFMR has issued 89 MOSECs for microloans worth more than $675 million, representing some 3.7 million loans securitized.

Using a similar model, it has done another $2 billion of MOSECs of affordable housing, small business and agricultural loans. The securitizations give the microfinance institutions access to low-cost capital at a price some 200 to 250 basis points lower than what they’d had previously, and to a new group of investors, including mutual funds, private banks and high-net-worth individuals.

Crucial to turning the idea into action was the special combination of people around the table at IFMR, says Mukherjee. Besides herself, with years of experience in structured finance at Morgan Stanley and Deutsche Bank, was Kshama Fernandes, then chief risk officer of IFMR Capital and now CEO of IFMR Capital, who had deep experience in Indian banking and was a well-known figure who provided credibility to their at-the-time unknown institution; Bindu Ananth, the president of IFMR Trust, whose idealism was essential to making the group press on and tackle problems rather than being discouraged by obstacles; and Gaurav Kumar, the head of origination, who intimately knew the individual lenders and the details of their business and could vouch for their creditworthiness.

“There was nothing in the law that actually prevented it. It was an innovation waiting to happen,” says Mukherjee. “At the end of the day, you apply the same tools and principles of diversification (you’ve done in the past). What we did was contribute to the learning in developing our own underwriting standards for microfinance and small business lenders. What we brought was discipline, expertise, and we became the expression for self-confidence for these asset classes.”

The securitizations have now become so commonplace that they are no longer considered innovative. However, IFMR remains alone in both structuring the deals and retaining a portion of the debt on its own books, says Mukherjee. That way, IFMR ensures that interests are aligned and that the deals are designed for long-term profitability and sustainability, she says.

Read the full report here.


From Looking to Seeing

By Kshama Fernandes, CEO, IFMR Capital

I met today with the promoter and CEO of one of our newer Small Business Loan Originators and visited some of their end borrowers in Bombay. I heard an interesting story of their very first client not too long ago. This was a sandwich vendor who runs a makeshift stall outside the Bombay Stock Exchange (BSE) and has been supplying sandwiches to the entire BSE crowd for years. Imagine a business with a captive clientele in one of the oldest and the largest exchange in India. One would think the vendor must be an attractive credit opportunity for any sensible lender. Well, it so happened that the gentleman had no access to formal credit for decades despite being located on Dalal Street – traditionally considered the nerve center of India’s capital. Till the day a credit officer from our Originator discovered him. As expected he had little to prove his credit worthiness. So the credit officer spent two days standing next to his little stall and counting the number of sandwiches he delivered to the BSE building from morning to evening. This was followed by a personal assessment through a Q&A session, a visit to his home and a few conversations with neighbours. Using the sandwich-movement-activity based cashflow and other observations, the credit officer built the sandwich vendor’s P&L and B/S. The vendor was given a one-year loan of INR 9 lakh. He repaid the loan in 6 months and reapplied for a larger loan, tapping into a formal source of finance for the second time in his life.

The CEO told me that when he left behind a promising career in a mainstream commercial bank and decided to get into a more interesting and possibly a higher margin business, he thought he would have to go to far flung areas of the country in search of those who had no access to credit. He was wrong. He found many such down the street from his office. I visited some of them today.

India is indeed a promising land. We simply need to look a little closer and go a little deeper into the lives of people around us – people whom we always ignored because we never thought they had potential. We need to stop looking and start seeing!


Microfinance through a Data Lens

By Vaibhav Anand & Aryasilpa Adhikari, IFMR Capital

In the last five years, the microfinance sector in India has grown into a stable and well-regulated sector thanks to a strengthened regulatory framework and credit bureau infrastructure. The regulatory oversight on NBFC MFIs and the advent of the microfinance credit bureau infrastructure with mandatory reporting requirements have made it possible to go beyond anecdotal evidence and analyse these issues in a robust manner which is the objective of this post. NBFC MFIs are generally registered with Equifax and/or Highmark to do credit bureau checks and report credit information on their portfolio periodically. Under RBI guidelines, NBFC MFIs cannot lend to a customer who already has two MFI lenders or whose total indebtedness exceeds INR 1,00,000. Gaps in the information available on bank lending to microfinance clients through the Self Help Group (‘SHG’) model are expected to be addressed over a period of time as banks start complying with the recent RBI guidelines relating to bank reporting on their SHG portfolio. NBFC MFIs also make higher provisioning including on standard assets of 1%. The silos in credit bureau market infrastructure are also expected to reduce as all credit institutions start reporting information to all credit bureaus under the guidelines issued by RBI in January 2015.

How far has the microfinance sector come since 2010? What is the quality of growth of rapidly growing MFIs? Is growth adversely affecting customer well-being? In this post, we attempt to understand these issues based on rigorous data. Given that a large proportion of excluded Indians, women in particular, depend on MFIs for their only source of financing, conclusions must be drawn with a great deal of responsibility.

Sources of data/information

Field observations discussed in this blog are based on over 200 field surveillance and monitoring visits conducted by IFMR Capital since April 2013. During these regular visits, the team covered more than 1000 microfinance centre meetings across 200 districts and 20 states, including interview-cum-discussion meetings with branch managers, loan officers, JLG borrowers and senior management at Head Office.

The microfinance sector performance data discussed in this blog is based on mainly two sources: (a) Microfinance sector level pincode reports for more than 500 districts subscribed from Equifax, one of the largest microfinance credit information bureaus in India, and (b) Performance data on microfinance portfolio based transactions, with underlying microfinance loans worth more than INR 3500 crores, structured by IFMR Capital.

Question 1: Is pipelining rampant?

Credit pipelining is the practice of borrowers routing the availed loan amount to another person, who may be a member of the group or a third person, referred to as beneficiary. The beneficiary usually uses the money for her/his own purpose and makes periodic repayments through the group. In lieu of their KYC and attendance at the centre meetings, borrowers may receive compensation (commission) from the beneficiary. If repayments are regular, it is difficult to identify such cases; it is only when the beneficiary is under financial distress and he/she finds it difficult to repay instalments, that pipelining is discovered. Such pipelining incidences are neither uncommon nor limited to a particular district, region or state. Credit pipelining, as discussed subsequently in this blog, is often a result of operational process dilution. Sporadic cases are observed across states during regular monitoring visits by IFMR Capital.

The recently highlighted instances (link) of credit pipelining and multiple lending, and events which unfolded subsequently in a village in Eastern UP are extremely unfortunate. Such instances undoubtedly require prompt and effective corrective action that must be institutionalised at the highest levels in an MFI. We completely disapprove practices that result in such instances and our position towards these is enshrined in our underwriting guidelines. While we continue seeing sporadic episodes across the country, our field analysis and data however don’t support the wide-spread nature of such issues. Based on pincode level data, we drilled down to district level and looked at the trend of portfolio performance, portfolio growth and multiple lending for the three eastern UP districts in recent focus – Azamgarh, Chandauli and Varanasi.   The data does not show evidence of excessive multiple lending by MFIs in these districts with less than 3% clients having more than two MFI loans.

Portfolio growth, proportion of clients with more than two MFI loans and delinquency levels in Azamgarh, Chandauli and Varanasi
*Source: Equifax

It is important to note that the underlying factors behind pipelining as well as the mitigating steps needed to curb pipelining are not new to the sector. Though it is true that pipelining is difficult to uncover, sooner or later such cases result in repayment delays by the involved members bringing these to the attention of the lender. Credit pipelining is often seen in centres where some or all of the following factors are present: (a) borrowers are not aware of the consequences of payment default such as negative profile in credit bureau and possible denial of credit in future, (b) Loan utilization checks are weak, (c) dilution of group formation and origination processes such as group recognition test (GRT) and continuous group training (CGT) and (d) MFI loan officer’s reliance on a single centre member (‘centre leader’) for centre operations such as group formation and collection of payments during the centre meeting. It is true that increasing competition and pressure to raise loan officer productivity may result in dilution in key processes and reliance on influential centre lenders.

In our discussions with management during monitoring visits, we have found that MFIs are aware of the underlying factors which result in such incidents and are increasingly focusing on mitigating mechanisms such as (i) Ceiling on origination linked incentives for loan officers (ii) disbursement conditional on strict compliance to CGT and GRT (iii) residence verification and meeting borrower’s family or spouse to ascertain loan utilization and to restate implications of credit default (iv) adherence to loan utilization checks (v) compliance to credit bureau processes and (vi) strengthening internal audit.

Question 2: Is there overheating?

Another concern discussed often in microfinance is over-indebtedness and the issue of borrowing by JLG members from multiple sources including MFIs. During monitoring visits to our NBFC MFI partners, we have observed a very high compliance to regulatory guidelines on multiple lending and borrower indebtedness across the sector. While the challenge posed by the usage of multiple KYCs by borrower is not unfounded, our understanding is that the prevalence and impact is limited. In addition to KYC identifiers, microfinance credit bureaus also rely on advanced algorithms to track borrowers in their database by matching borrower name, spouse or relative name, address string and address pincode. Based on the loan level portfolio scrub data queried from one of the credit bureaus, we observed that same client with different KYC documents and ID numbers was identified based on name and address string. Such algorithms reduce the risk of multiple lending due to multiple KYC IDs, alerting the lending institution on matches found in the credit bureau information even when different KYCs are used.

We used pincode level microfinance loan performance data available for nearly 6000 pincodes across more than 500 districts, to measure the prevalence and impact of multiple lending. We define multiple lending as availing of more than two MFI loans by a single client at a given time. We measured multiple lending in a district as the proportion of clients with more than two MFI loans.

Our findings suggest that a median multiple lending of 2.35% and 1.50% as of Mar-2015 and Mar-2014 respectively. For 90% of districts, which incidentally also account for 90% of microfinance portfolio, the multiple lending measured is less than 9% as of Mar-2015 (up from 6% as of Mar-2014). It should be noted that our measure of MFI multiple lending is fairly conservative. Even during monitoring visits, we often see clients with three MFI loans. One of the primary reasons is the lag between the disbursal of a new loan and its reporting to the credit bureau by the MFI. During such period, the client may receive loan from another MFI (or MFIs) as credit bureau check may not show the existing loans accurately in the short transition period. However, the prevalence of this operational issue is limited. With many NBFC MFIs moving to weekly sharing of performance data with credit bureaus, we expect to see a decline in multiple loan instances due to such operational reasons.

Proportion of more than 2 MFI loans in districts
*Source: Equifax

We also checked for the microfinance portfolio being originated in districts with different proportion of multiple lending. In simple words: are districts with higher multiple lending contributing disproportionately more to the sector portfolio outstanding? The graph below shows that nearly 90% of portfolio is originated in districts where less than 9% clients have more than 2 loans from MFIs. Similarly, nearly 95% of portfolio is originated in districts where less than 15% clients have more than 2 loans from MFIs. Certainly, this data does not account for loans taken by borrowers under SHG scheme as well as loans from non-NBFC MFIs, private money lenders, and other such sources which do not report to credit bureaus. Also, the data may include limited microfinance portfolio originated by banks through business correspondents.

Cumulative portfolio contribution by districts with multiple lending

*Source: Equifax

Additionally, we also look at portfolio performance in districts with high proportion of clients with more than 2 MFI loans. We found little overlap between the top ten percentile districts with highest delinquencies and districts with highest proportion of clients with more than 2 MFI loans as of Mar-2015.

Top 10 percentile districts: Delinquency vs Clients with >2 MFI Loans

*Source: Equifax
**Grey dots show districts with MFI presence. The representation is to show microfinance presence and is not an official map of the country or state.

Question 3: Is growth affecting credit quality?

We looked at data to see if higher growth would result in process dilution and subsequently lower quality portfolio. The performance of microfinance portfolio transactions structure by IFMR Capital shows a significant improvement over the last few years.

Loss and Default percent on microfinance portfolio transactions structured by IFMR Capital (based on 286 pools underlying loans worth INR 3.5 thousand crores)
*Source: IFMR Capital

Sector level microfinance performance data also substantiates a stable and healthy growth for the sector. Based on the district level portfolio growth from FY13-14 to FY14-15 and fresh delinquency occurrence (loans overdue by 0 to 180 days) as of FY14-15, we identified the top 10 percentile and top 20 percentile districts in both categories. One would expect that if portfolio growth is unrestrained in a district, it would result in higher delinquency. We found little overlap between the two group of districts, i.e. top growth and top delinquent districts, suggesting that growth is higher but not unrestrained, and is not necessarily resulting in process dilution and subsequent lower quality portfolio.

Comparison of top portfolio growth and top delinquency districts
*Source: Equifax
**Grey dots show districts with MFI presence. The representation is to show microfinance presence and is not an official map of the country or state.


Our data does not support wide-spread prevalence of pipelining or over-lending. Neither does it support deterioration in portfolio quality due to growth. The effective implementation and usage of credit information bureaus by MFIs is key to controlling these issues. Challenges related to KYC documents of borrowers exist. Using technology, credit bureaus have tried to address this problem by matching borrower and spouse names as well as address strings to identify duplicate borrowers in the system. Further, to mitigate the risk of using multiple KYC documents, MFIN has provided guidelines to all member MFIs to adopt the Aadhaar number as the unique KYC identifier over the next two years. There is also a need to bring other sources of credit in the formal regulated regime. Credit performance data under the self-help group (SHG) program should also be brought onto the credit bureau reporting system to ensure complete visibility on indebtedness and credit performance. In a significant step towards ensuring this, RBI recently issued another circular (link) directing banks to complete reporting of SHG data to credit bureaus in two phases by July 2017.