MICROCAPITAL STORY: Equitas Micro Finance Gets Transaction Securitized and Rated by CRISIL, Structured and Arranged by the Institute for Financial Management and Research

Equitas Micro Finance India announced it has completed a microloan backed rated securitization worth USD 3.0m.  According to a press release in the Economic Times, the pass-through certificates are rated by CRISIL and backed by microloan receivables originated by Equitas.  CRISIL is an Indian rating company and a division of Standard and Poor’s. The Series A1 certificates are rated AA(so) and the Series A2 certificates are rated BBB(so).  IFMR, the Institute for Financial Management and Research in India, structured and arranged the transaction.  The COO of Equitas, S. Baskar, commented “traditionally MFIs in India have had to access only banks for debt raising, placing limitations.  This transaction would open a new window to the industry to raise debt from those banks which do not generally participating (sic) in funding to MFIs”. 

Securitization of microloan receivables such as this one have been previously absent in India due to the unique aspects of microloans which include short maturities, origination risk resulting from the short maturities, the key role and risk of the MFI as servicer, and the lack of standardized ratings.  Instead Indian banks typically purchase an MFI’s microloans without housing the assets or issuing securities backed by the loans, such as the recent USD 38 million transaction SKS Microfinance completed with ICICI bank, the second largest bank in India.  CDO transactions, in which loans to various MFI’s are pooled together, have been another common alternative to pass-through certificates for microfinance organizations.

Total demand for microfinance services in India is estimated at 300 million people, with approximately 70 percent of this demand unmet.  Non-Bank Financial Institutions (NBFCs) such as Equitas, and Section 25 Companies account for about 80 percent of microfinance services, in terms of clients served and loan portfolios. Section 25 Companies are non-deposit taking, non-profit, limited liability companies serving charity and social purposes. NBFCs are for-profit and can take deposits.  Both are regulated by the Reserve Bank of India (RBI).  NBFCs are subject to minimum capital and capital adequacy requirements.

Equitas Micro Finance India, formerly known as UPDB Micro Finance, was established in 2007 targeting 180,000 members in the state of Tamil Nadu and currently has 10 branches serving over 16,000 borrowers.  The company has been selected by Unitus Advisors P Ltd., a financial advisory firm specializing in arranging capital for microfinance institutions, as a partner for receiving technical advisory services.  According to MixMarket, the microfinance information clearinghouse, as of March 31, 2008 the company reported total assets of USD 4.8m, a gross loan portfolio of USD 4.1m, and a debt to equity ratio of 0.66.

 By Laura Anderson, Research Associate

 Additional Resources:

 The Economic Times: Equitas Gets MFI Transaction Securitised and Rated

 SKS Microfinance:  Home

 Equitas Micro Finance: Home

 Reserve Bank of India: Home

 Institute for Financial Management and Research: Home

 MicroCapital article, March 16, 2009: Indian SKS Microfinance Issues Bonds and Commercial Notes, and Announces a $963.6m Borrowing Plan to Finance Rapid Growth

 MicroCapital article, September 3, 2008: Rising Interest Rates and New Reserve Bank of India Capital Adequacy Requirements Put Pressure on Indian MFIs

 MicroCapital article, August 25, 2008: Indian For-Profit Equitas Microfinance Raises $12.5 million in Equity Capital from Bellwether Fund, Indian Financial Fund, MicroVentures, SPA

 MixMarket: Equitas Micro Finance India Profile

 “The Role of Private Sector Investment in International Microfinance and the Implications of Domestic Regulatory Environments”, by William Langer, Developing World Markets: March 2009

 ICICI: Home

 “Securitization in Microfinance”, by Brad Swanson, Developing World Markets: June 2007.

 Unitus: Home

 Hindu Business Line:  More MFIs Securitizing Loans to Raise Funds

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