Chennai: The country's microfinance sector witnessed the first ever mutual fund investment with a micro-loan securitisation, completed by IFMR Capital and Equitas Micro Finance. The Rs 48-crore transaction is backed by over 55,000 micro-loans originated by Equitas Micro Finance, a Chennai-based microfinance institution with approximately 700,000 low-income clients.
The transaction was structured by IFMR Capital, which operates as a financial guarantee company for sectors impacting low-income households, and which co-invested in the junior tranche of the securitisation, says a release.
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"We are pleased to be the originator in the first ever microfinance securitisation programme to reach capital market investors," remarks S. Bhaskar, COO, Equitas. "This is an important milestone in diversifying the sources of funds for microfinance companies, and will benefit a large number of microfinance borrowers over time."
ICICI Prudential Asset Management, India's second largest mutual fund, subscribed to a majority of the securities. Axis Bank, Dhanalakshmi Bank, and IFMR Capital also subscribed.
"We have invested in the senior A1 tranche based on our analysis of risk and reward. We believe the issue is fairly priced, provides adequate security and is highly rated," says Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management.
By investing in micro-loan backed securities, mutual funds and other institutional investors can own an asset that is both high in quality and low in correlation to other asset classes. Micro-loan securitisation also provides banks an attractive way to increase their investment in the microfinance sector through rated, tradable securities.
Manish Saraf, Head Treasury, Dhanalakshmi Bank, said, "Microfinance has always been a focus area for the bank. It was logical for the bank to participate in a transaction that allows banks to engage in direct Priority Sector lending in a tradable form. While the structure permits MFIs to raise funding from non-banking channels over a period of time, the rated instruments will also lower capital charge for banks."
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Primary credit enhancement is provided by Equitas in the form of cash collateral, and will absorb any realised losses up to 10.6% of the portfolio cash flows.
"This transaction has allowed Equitas to access funding at a rate significantly lower than its average cost of funds," said Sucharita Mukherjee, CEO of IFMR Capital. "It also sets a new benchmark for other microfinance institutions that have robust systems and high levels of transparency."
