MICROCAPITAL STORY: India’s microfinance sector softens while Indian MFIs Turn to Securitizing Loans to Raise Funds

As the microfinance sector in India begins to unwind, more microfinance institutions in the country are increasingly looking at securitization as a method for off-balance sheet financing for capital relief. The intention is to free up capital and reduce borrowing costs. According to Dilli Raj, Chief Financial Officer of SKS Microfinance, “securitization is a win-win for both MFIs and banks/investors.”

Typically, securitization offers funding that is 100-150 basis points lower than term loans. Amy Yee of the Financial Times reported that over the past few years the transformation of the microfinance sector grew as such that it attracted the likes of venture capitalists and private equity investors alike with the large untapped pool of Indian customers that needed small loans coupled with high repayments rates of about 98 percent. The first such major venture capital firm to invest in SKS, India’s largest MFI, was in 2007 by Seqoia. The firm invested USD 11 million and had previously financially backed firms such as Google and Apple.

As a timeframe for a global recovery proves to be uncertain and the rapid growth in India appears to be slowing down, the long-term outlook for microfinance in the region is largely positive. In 2007 India grew by 79 percent in terms of value of loans outstanding. Raman Uberoi, Senior Director of India’s ratings agency, Crisil, reported to The Hindu Business Line, that “as MFIs grow they need to look at alternate sources of funding for the better MFIs, with strong asset quality, no high delinquencies and a strong underlying cash flow, the loans are pretty amenable to being structured and sold. It enables them to tap sources beyond bank lending and equity, which is what we have seen so far.”

The Financial Times has also reported that while repayment rates at micro-loans remain high, overall liquidity from banks dry up and consumer loan delinquencies have increased, the demand for small business loans for poor borrowers is strong. Moreover, the bank’s portfolios at investment firms such as ABN-Amro in India have seen zero delinquencies in the last five years with many investors viewing microfinance as an alternative asset class.

MicroCapital reported on March 16, 2009 that SKS microfinance announced that it aims to raise one-tenth of its USD 963.6 million borrowing plan for the next fiscal year through USD 96.4 million worth of securitization deals with financial institutions. The announcement was made shortly after SKS sold USD 4.8 million non-convertible debentures (NCD) with YES Bank and generated another USD 4.8 million through the issuance of commercial paper (CP).

While the global recession continues to force banks towards tighter credit and lending standards, customers continue to repay loans at high rates from MFIs. As reported by the Financial Times, Microfinance Insights (Mumbai-based magazine), concluded this month in a global survey that more than 25 percent of non-deposit taking MFIs decreased their lending in the last 12 months with 36 percent revised their growth projections downward. Interestingly enough, four out of five investors have not reduced their portfolio allocation towards MFIs.

By Zoran Stanisljevic

Additional Resources

The Hindu Business Line: More MFIs securitising loans to raise funds

The Microfinance Gateway: Indian MFIs Turn to Securitizing Loans to Raise Funds

Financial Times: Buzz around India’s microfinance sector quietens

MicroCapital Story, March 2009: MICROCAPITAL STORY: Indian SKS Microfinance Issues Bonds and Commercial Notes, and Announces a $963.6m Borrowing Plan to Finance Rapid Growth