The micro-loan securitization with pass-through certificates (PTCs or securities), completed by the Institute for Financial Management and Research (IFMR) Capital and Equitas Micro Finance India Pvt Ltd, has created an opportunity for mutual funds to invest in the Indian microfinance sector. IFMR Capital is a non-banking finance company based in Chennai, India, and Equitas is a microfinance institution (MFI) also based in Chennai.
The transaction involves the packaging for re-sale of 55,000 microloans worth the equivalent of USD 10.4 million, raising cash for Equitas to increase on-lending at a lower cost than it would pay to borrow from a bank. The PTCs, structured by IFMR Capital, have been rated by CRISIL, a subsidiary of Standard & Poor’s, as three separate tranches, in order to cater to various investor risk profiles and expand the range of possible investors. The ratings, which were recently upgraded by CRISIL in October 2009, are P1+(so) (highest possible rating for short term securities), AAA(so), and A(so). [5] For more specific information on current ratings of each tranche, look to bibliography.
About Institute for Financial Research and Management (IFMR) Capital:
IFMR Capital, previously known as as IFMR Trust Guarantee Company, is a non-banking finance company based in Chennai. It aims to provide access to capital to institutions in sectors such as, rural and urban financial service providers, municipalities, small and medium enterprises in the rural sector, rural infrastructure, agriculture, and others. It also aims to develop markets for new asset classes, such as microfinance.
About Equitas Micro Finance India Pvt Ltd:
Equitas is a microfinance institution that was created in December 2007 and is located in Chennai, India. According to the MIX Market, as of November 2009, Equitas reportedly has a gross loan portfolio of USD 43 million, about 339,158 active borrowers, and total assets of USD 61 million. Its return on assets are reported as 1.52 percent and return on equity as 4.02 percent.
Bibliography:
[1] IFMR Capital Press Release. November 20, 2009.http://www.ifmrtrust.co.in/downloads/IFMR_Capital_Equitas_Press_Release_20112009.pdf
[2] PRNewswire.com. “First Mutual Fund Investment in Microfinance in India.” http://www.prnewswire.com/news-releases/first-mutual-fund-investment-in-microfinance-in-india-70624067.html
[3] IFMR Capital Press Release. March 9, 2009. http://www.ifmrtrust.co.in/downloads/20090309_IFMR_Capital_press_release.pdf
[4] Microfinance Focus. “Equitas securitization deal facilitated first mutual fund investment in Indian Microfinance.” http://www.microfinancefocus.com/news/2009/11/21/ifmr-capital-%E2%80%93-equitas-securitization-deal-facilitated-first-mutual-fund-investment-in-indian-microfinance/
[5] Reuters. “CRISIL Upgrades Ratings of First Microfinance PTCs.” http://www.reuters.com/article/pressRelease/idUS144639+27-Oct-2009+PRN20091027
[6] MICROCAPITAL STORY: Equitas Micro Finance Gets Transaction Securitized and Rated by CRISIL, Structured and Arranged by the Institute for Financial Management and Research. https://www.microcapital.org/microcapital-story-equitas-micro-finance-gets-transaction-securitized-and-rated-by-crisil-structured-and-arranged-by-the-institute-for-financial-management-and-research/
[7] IFMR Capital. https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=IFMR+Capital
[8] Equitas Micro Finance India Pvt Ltd. https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Equitas+Micro+Finance+India+Pvt+Ltd
Original Source Article:
IFMR Press Release November 20, 2009
First Mutual Fund Investment in Microfinance in India
A recent micro-loan securitisation, completed by IFMR Capital and Equitas Micro Finance, has enabled the first ever mutual fund investment into the Indian microfinance sector. The Rs. 480 million ($10.4 million) 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.
“We are pleased to be the originator in the first ever microfinance securitisation programme to reach capital market investors,” remarks Mr. 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.”
The transaction has been structured into three separately rated tranches to match investor risk-return profiles, thus expanding the range of institutions that can invest in the asset class. CRISIL (subsidiary of Standard & Poor’s) rated the tranches P1+ (so) (the highest possible rating for short term securities), AA (so), and BBB (so).
ICICI Prudential Asset Management, India’s third 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.”
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. For the senior and mezzanine tranches, additional credit enhancement is provided by the junior tranche, to which IFMR Capital subscribed. This transaction structure is designed to align the interests of the originator and structurer with the interests of end investors.
“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.”
As the market develops for micro-loan backed securities, more microfinance institutions will be able to access mainstream capital markets. This will allow them to deliver more- affordable financial services to clients who have traditionally been excluded from the financial system.
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