The International Growth Centre at the London School of Economics (LSE) is an institution that offers independent advice on economic growth to governments of developing countries. Bringing top policy-makers and researchers together, it endeavors to support policymaking with thorough research evidence as the foundation.

As a part of its growth initiative the IGC recently convened “Growth Week” between 19th to 21st September at LSE, a 3-day conference which brought together a diverse set of policy-makers and researchers from Africa & South Asia. Viral Acharya organized the session on Finance, Colin Mayer chaired the part on Macrofinance and Greg Fischer chaired the part on Mobile Banking. The focus of the session was on identifying areas of academic research on policy issues that practitioners and policymakers are seeking to address in relation to finance in developing countries and emerging markets.

Kshama Fernandes represented IFMR Trust and participated on the panel on “Ideas for growth: Macro Finance” along with Dr. Subir Gokarn, Deputy Governor, Reserve Bank of India & Ms. Shyamala Gopinath, former Deputy Governor, Reserve Bank of India.

Talking about the past, present and future role of commercial banks in India, Dr. Gokarn spoke of the efficiencies and inefficiencies of the system and the challenges they pose in the present context. While suggesting that there was a need to build on the existing penetration of banks, banks would continue to remain the principal channel of intermediation as far as lending is concerned.  However other financial intermediaries could have a significant role to play in the financial inclusion space by developing business models that were designed to address the specific needs of their customers.

In her presentation, Ms. Gopinath pointed out that while financial innovation definitely does have an impact on growth, it needs a precise framework to function in the desired manner. The basic framework required was:

• Reasonable sophistication of participants (Financial literacy)
• Sound legal framework for dispute resolution
• Robust market infrastructure
• Reasonably liquid and deep cash market
• Financial Stability

Kshama Fernandes presented the Financial Systems Design framework based on a bottom-up approach with high quality origination, orderly risk transmission and robust risk aggregation as the three pillars of a well-functioning financial system.

The presentation below describes the key issues, the enabling infrastructure and some research questions that were discussed during the session.

The panel was attended by a large number of academics, researchers and some practitioners and generated a lot of discussion and interest on potential areas for future research. The broad areas that came up for research included: Finance and Growth (investment, bank lending, venture capital); Financial Systems and Stability (asset markets, securitization, financial regulation); and Financial Inclusion and Access by the Poor to Financial Services (savings, borrowing, payments).

As a follow-up to the Growth Week and an effort to advance these research areas, there will be a meeting of all academics associated with the Finance Programme of IGC on Tuesday November 15 at the LSE in London.

By Vineet Sukumar, IFMR Capital

The Reserve Bank of India yesterday released a fresh set of draft guidelines governing securitisation and assignment transactions. While the draft was released by the Department of Banking Operations and addressed to banks, it is expected that a similar draft will be issued for NBFCs as well.

The draft guidelines are comprehensive and cover various aspects of a securitisation including minimum holding period (MHP), minimum retention or risk (MRR), accounting treatment, true sale, credit enhancement requirements and due diligence by the purchaser. Further, the RBI seeks to cover assignment transactions under the ambit of its regulations.

Securitisation and assignment transactions have emerged as preferred financing routes for NBFCs in the last few years. On the whole, banks have been net buyers, acquiring largely priority sector portfolios from NBFCs. Given the stringent first loss requirements imposed by the RBI in the 2006 guidelines (marked off against Tier I and Tier II Capital, fixed till maturity of the transaction), banks issuers have been rare.

At the same time, securitisation has emerged as a viable route for non-traditional originators to access the capital markets. Microfinance institutions (MFIs) have raised substantial funds through this route, with the first rated assignment in 2004 and the first rated securitisation in 2009. In October 2010, the microfinance sector faced headwinds after the Andhra Pradesh government issued an ordinance curtailing microfinance activities. Post the ordinance, securitisation has emerged as the largest source of financing for MFIs, with an estimated INR 15 billion raised via this route¹.

We will attempt to highlight the key changes / inclusions in the draft guidelines and potential implications on issuances

• Minimum Holding Period (MHP)

MHP for loans is distinguished on two parameters:  a) frequency of repayment schedule (quarterly or more frequent) and b) tenor of loan (less or greater than 24 months). While the logic behind including the former is understandable and a good move, it is unclear why the RBI has split the market on a 24 month tenor basis. It would be significantly better from a regulatory perspective  to assess MHP requirements based on the average life of the underlying loans. This would prevent the possibility of having a 6 month MHP on a loan with weekly repayments and tenor of 12 months.

Imposing a high MHP will, in effect, prevent securitisation of lower tenor loans completely. Potentially, this could disincentivise originators from providing lower tenor loans due to lack of financing, thus increasing balance sheet risk.

• Minimum Retention of Risk (MRR)

The guidelines also advise a MRR of 5%. This is a welcome inclusion and in line with global practices. The concept of a dynamic cash collateral and reduction of the MRR through the transaction tenor is a good step that should bring bank originators back into the market. Further, this will force rating agencies to model and monitor asset behavior more closely.  It would be better, in our view, if the RBI allowed market forces to determine the frequency / amount of release of credit enhancement, rather than stipulate time / amount of release – given the variation in performance of different asset classes.

The draft guidelines also permit originators to invest into the equity tranche of a securitisation, unlike the existing regulation that allows originators to invest only into senior securities issued by an SPV.

• Accounting of Profits

The guidelines allow originators to recognise the cash profit on a limited basis on premium structure deals. Such profits is to be termed as “Cash Profit on Loan Transfer Transactions Pending Recognition” and maintained on a transaction basis. This divergence from regular accounting standards will encourage corporates to move away from amortisation to straight line basis. In a financial year, any loss on account of Mark to Market and write off will be adjusted in this account and net effect will be transferred to profit and loss account

• Assignments

The  RBI has finally stepped in to fill the regulatory vaccum that existed with respect to bilateral assignment of assets. Bilateral assignment is now governed by guidelines similar to that of securitisation. One major difference however, is that “external” credit enhancement by the originator is banned under the assignment route. The offered justification is that subscribers to this route are sophisticated, institutional investors who should be able to assess the risk involved and take a decision on the exposure. Disallowing credit enhancement will only increase investor discomfort in this route and prevent such transactions from taking place. The sophisticated market forces that exist under the assignment route should be able to determine the need for cash collateral.

• Purchaser due diligence

The guidelines place a greater onus on the buyer with respect to due diligence. Purchasers must carry out verification on at least 5% of the obligors. Such verification cannot be delegated to a specialized firm. The guidelines also require rigorous credit monitoring and identification of non-performing borrowers 90 days after the loans are due. Banks are required to collect information regarding default rates, prepayment rates, loans in foreclosure, collateral type and occupancy, and frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification.

It is essential that buyers are aware of the assets that they are investing in and the above requirements will ensure that quality of due diligence improves.

Last year, securitisation volumes fell by 29%. This was largely believed to be a fall-out of the draft guidelines released in April 2010.  The revised draft guidelines are significantly more comprehensive and include features that could completely transform the market. However, the draft guidelines are also too prescriptve. This could stifle a sector that has just begun to find its feet in the Indian market. A nuanced regulatory policy that recognizes the varied and dynamic nature of the market and encourages financial innovation is necessary.

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1 – IFMR Capital estimates

After executing its largest Multi-Originator transaction involving 7 microfinance institutions, IFMR Capital recently closed one of its largest Single Originator transactions this financial year, with one of the leading MFIs in the country, Ujjivan Financial Services.

It recently structured and arranged a Rs. 401 million securitisation transaction backed by 45,954 microloans originated by Ujjivan Financial Services. This is the sixth capital market transaction for Ujjivan and second securitisation transaction. Ujjivan has raised debt capital through issuance of listed, secured, redeemable, non-convertible debentures in the last and current financial year.

KRIOS PIONEER IFMR CAPITAL 2011, the Special Purpose Vehicle created for the transaction, has issued two tranches of securities rated by CRISIL, India’s foremost rating agency:  an 89.5% senior tranche rated CRISIL A1(So) that was subscribed to by a NBFC and a 10.5% subordinated junior tranche that was invested into by IFMR Capital. Both tranches have an expected maturity of 9 months.

The structure created by IFMR Capital ensures that the incentives of the originator, servicer and structure are aligned. While the originator and servicer, Ujjivan, 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 ensures that the senior investor is protected against losses and any first loss is borne by the originator and the second loss by the structurer.

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 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.

ICRA and CRISIL have upgraded the ratings assigned to the Senior Pass Through Certificates (PTCs) and Assignee Payouts pertaining to three transactions backed by micro loan pool receivables originated by Grama Vidiyal Microfinance Limited (GVMFL) and two transactions backed by micro loan pool receivables – one originated by Satin Creditcare Network Ltd. and one by Janalakshmi Financial Services Private Limited respectively.

ICRA upgrades micro loan pool receivables originated by Grama Vidiyal Microfinance Limited (GVMFL)

The ratings upgrade reflects the good collection performance on the underlying pools so far, and enhanced credit enhancement cover for the rated instruments / payouts over the balance tenure.

The summary of the rating actions taken by ICRA is given below.

In case of all the three aforementioned transactions, the selected pool comprised of unsecured micro loans (less than or equal to Rs. 20,000 each), with low initial tenure of contracts (50 weeks), moderately high initial seasoning and no overdue. Moreover, the pools comprised of General Loans^[2] only.

A brief performance summary for these pools is given below

As can be seen from the table above, the cumulative collection efficiency for all the above-mentioned transactions has been 100% and no delinquencies have been reported in these transactions so far. As a result, no cash collateral has been utilised in these transactions till date. The credit enhancement available in the transactions is sufficient to support the revised rating level.

CRISIL Upgrades micro loan pool receivables originated by Satin Creditcare Network Ltd

# Indicates door-to-door tenure between the issuance date and legal final maturity date; actual tenure will depend on the level of prepayments in the pool, exercise of clean-up call option, and extent of shortfalls

& The Series A1 PTCs are entitled to receive interest on a fortnightly basis. There is an expected schedule for principal repayments for the Series A1 PTCs; however the structure allows for principal payments to be made by the maturity date of the PTCs (ultimate payment structure)

* Credit support for the Series A1 PTCs includes Rs.22.7 million in the form of subordination of cash flows over and above the scheduled payouts promised to the Series A1 PTCs

$ Credit support for the principal repayment on the Series A2 PTCs includes Rs. 8.4 million of subordinated cash flows

CRISIL has upgraded its ratings on the Series A1 and Series A2 PTCs issued by Theta Pioneer IFMR Capital 2011 to ‘P1+(so)’ from ‘P2+(so)’, and to ‘P3+(so)’ from ‘P4(so)’ respectively. The PTCs are backed by microfinance loan receivables originated by Satin Creditcare Network Ltd. The upgrade is driven by strong collection performance together with low overdue level of the pool, which has led to an increase in the cover provided for the PTC payouts by the available credit collateral.

Pool Performance Summary (as per May 23, 2011 payout report)

CRISIL Upgrades micro loan pool receivables originated by Janalakshmi Financial Services Private Limited

 

- G E Balajee, IFMR Blog Team

The recent securitisation transaction completed by IFMR Capital was a landmark deal in the microfinance sector. It was a Rs. 108 Mn rated securitisation transaction backed by microloans originated by Grama Vidiyal Micro Finance Limited. This is not the first time that a transaction such as this has been executed by IFMR Capital. What makes this transaction special is that, this is the first time private wealth investors have invested in microfinance. In other words, this is one of the best examples of the wealth of the richest being directed towards the poorest in the country.

IFMR Capital already has some innovations in the area of securitisation to its credit. Its Multi-Originator (MOSEC) structures have focused on smaller but high quality microfinance institutions (MFIs) that deserved capital market exposure. It has also arranged the first mutual fund investment in microfinance. “We have always been on the lookout for new investor classes for our clients”, says Vineet Sukumar, who heads Origination and Treasury at IFMR Capital.

Though a lot of private investors would have liked to invest in the sector, lack of publicly available information about the MFIs has been an important reason that has kept them away. “Efforts by IFMR Capital in collecting granular data, success in transaction placement, and engagement with a strong private wealth advisor like Avendus has ensured that a good start has been made”, explains Meenal Madhukar who heads Investor Relations at IFMR Capital.

While a commercial institutional investor has the resources to verify information about a company before investing, a private wealth investor relies on, and is very sensitive to, public opinion and information released in the press. Ever since SKS IPO filed its draft red herring prospectus, the sector has been beset with negative press coverage. It is well known that bank funding to MFIs had dried up after the Andhra Pradesh (AP) ordinance. If traditional sources were apprehensive of the future of the sector, private investors were even more wary of investing in the sector.

“This investment, coming in the backdrop of the AP Ordinance and liquidity shortfall in the sector, conveys a strong message that the sector is able to diversify fund sources even at such tough times. Further, funds from such non-traditional sources are being availed at commercial rates that are well comparable with other fund sources. Separately, IFMR Capital’s success in inculcating a new investor class into the sector at this time underscores the success of our business model and strategy”, says Vineet.

So what does this do to the microfinance sector? The earlier securitisation transactions arranged by IFMR Capital have consistently helped smoothen out the seasonality of the funding pattern that is prevalent in the MFI sector, or for that matter, even in the priority sector as a whole.

“This opens up a vast opportunity for microfinance. In general, private wealth investors have higher risk-taking ability and able to invest in times when mainstream investors take a back seat. So this deal not only opens a large investor base, but also a diversification opportunity to raise funding in tougher times”, explains Meenal.

This investment by private wealth investor is expected to form the base for more High Networth Individuals (HNI) and family offices to evaluate this sector. Family offices are substantial sources of funds in today’s market. While microfinance presents a good opportunity for social investing with commercial returns, the disclosures, monitoring and transparency associated with a structure of this nature makes the transaction attractive.

Here’s hoping that this transaction helps scale up private wealth investment into microfinance.

IFMR Capital recently structured and arranged a Rs. 108 million securitisation transaction – backed by 11,304 microloans originated by one of the leading MFIs in the country, Grama Vidiyal based out of Trichy. Beta IFMR CAPITAL 2011, the Special Purpose Vehicle created for the transaction, issued two tranches of securities rated by ICRA: 84% senior tranche rated A1(SO) that was subscribed to by private wealth investors and 16% subordinated junior tranche rated A3(SO) that was subscribed to by private wealth investors and IFMR Capital.

“This deal represents the largest debt investment by private wealth investors into the microfinance sector. We are happy to see the investor base expand, helping us infuse liquidity to high quality MFIs at this crucial juncture,” said Meenal Madhukar, Head – Investor Relations at IFMR Capital

Nikhil Kapadia, CEO-Wealth Management, Avendus Capital, said “We were the first wealth management firm in India to identify the opportunity in subscribing to these securitised papers, now our investor base has increased its allocations to such customized instruments and has allowed us to syndicate a full issue. Our wealth platform is based on the concept of Solutions which are structured for each client need and hence we constantly seek innovative products for each risk level”.

The structure created by IFMR Capital ensures that the incentives of the originator, servicer and structurer are aligned. This has enabled a variety of investors – banks, NBFCs, mutual funds and now private wealth investors – to provide much-needed liquidity to the sector via investment in IFMR Capital-structured transactions

IFMR Capital recently structured and arranged a Rs. 173 million securitisation transaction. The transaction is backed by 21,170 microloans originated by one of the leading MFIs in the country, Ujjivan Financial Services. This is the third capital market transaction for Ujjivan and first securitisation transaction. Ujjivan has raised debt capital through issuance of listed, secured, redeemable, non-convertible debentures in the last financial year.

OMEGA PIONEER IFMR CAPITAL 2011, the Special Purpose Vehicle created for the transaction, has issued two tranches of securities rated by ICRA, India’s foremost rating agency:  an 91% senior tranche rated LBBB+(so) that was subscribed to by Ratnakar Bank and a 9% subordinated junior tranche rated LBB(so) that was invested into by IFMR Capital. Both tranches have an expected maturity of 9 months.

Kshama Fernandes, the CRO of IFMR Capital said, “We are pleased to start a relationship with Ujjivan, a high quality originator. The deal affirms IFMR Capital’s commitment to the microfinance sector. Creating marketability of these assets to a broader universe of investors has expanded access to capital for micro-finance institutions”.

S.B. Mukherji, Chief General Manager, Agri. & Financial Inclusion Group, Ratnakar Bank said “Financial Inclusion is one of the cornerstones of Ratnakar Bank’s Vision and it will be executed through multiple business models, directly from our branches and through high quality partner institutions like Ujjivan and IFMR”

The structure created by IFMR Capital ensures that the incentives of the originator, servicer and structure are aligned. While the originator and servicer, Ujjivan, provides cash collateral of 10% of the pool principal, 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 ensures that the senior investor is protected against losses and any first loss is borne by the originator and the second loss by the structurer.

IFMR Capital has recently structured, arranged and invested in two more securitisation transactions Lamdba Pioneer and Sigma2 Pioneer with two different MFIs. The Rs. 188.23 Mn Lambda Pioneer transaction, completed with Trichy based Grama Vidiyal Microfinance Limited, was in the nature of Pass Through Certificates (PTC) credit enhanced through cash collateral from the originator and second loss credit enhancement from IFMR Capital.

The other transaction, Sigma 2 Pioneer, was completed with Grameen Koota for an amount of Rs. 175.75 Mn, the nature of the transaction being assignment of receivables credit enhanced through Cash Collateral from Originator and Second Loss Credit Enhancement from IFMR Capital.

Details of the transactions