Microfinance institutions (MFIs) have something to cheer about. Securitised microfinance loans are getting grades that are better than the ratings assigned to micro lenders selling these portfolios, say analysts and those in the sector.
This has persuaded banks and non-banking finance companies to buy securitised loan portfolios from MFIs, even if these were based in Andhra Pradesh, where the state government has imposed restrictions on micro lending.
For instance, Hyderabad-based SKS Microfinance sold close to Rs 900 crore of securitised assets to various banks and financial institutions in the January-March quarter. Some of these portfolios were assigned a PR1+ rating, a notch above SKS’ own rating, of PR1.
Companies in the sector estimate close to Rs 1,500 crore of securitised assets were sold by six MFIs in January-March. Of this, SKS Microfinance alone sold Rs 900 crore. Others active in the securitised asset market include Bandhan Financial Services and Arohan Financial Services.
Raising liquidity by way of securitising their portfolios has helped the sector in troubled times. Micro lenders said receivables from the securitised assets are from markets outside Andhra Pradesh, where loan recovery continues to remain healthy.
Hence, the portfolios are getting better ratings than companies affected by the crisis in Andhra Pradesh’s microfinance market.
“Banks are interested in buying securitised loan portfolios originating outside Andhra Pradesh,” S Dilli Raj, chief financial officer of SKS, told Business Standard. “The recovery rate is high in those markets and the asset quality is good. Hence, the portfolios are given higher ratings. Also, the way some of these transactions are structured leads to higher ratings for the securitised portfolio.”
Industry players said MFIs often agree to provide cash deposits as collateral to banks buying the securitised portfolios.
Sometimes, the micro lenders are also willing to bear a part of the losses if these portfolios turn non-performing.
“Higher ratings are assigned since the risk is shared between the banks and MFIs,” said the chief executive of a Tamil Nadu-based microfinance company.
While higher ratings or credit enhancement is not new, it certainly helps the troubled sector sell securitised portfolios.
However, experts and even rating agencies differ when ratings of loan pools are higher than the issuing MFIs’ ratings. For example, Fitch Ratings has stated it will not give such a rating.
A Fitch spokesperson explained, “The intricate service arrangements, coupled with the lack of institutional back-up collection mechanism, make the rating of microfinance securitisation inextricably linked to that of the originator/servicer. In the absence of suitable mitigants with respect to such counterparties, Fitch will link the rating of transaction to the rating of originator or the servicer.”
MFIs operate in a model whereby a group leader in a particular geographical area, mostly small village, acts as a collecting agent and ensures recovery of loans and installments.
A spokesperson for Icra, which has also rated MFIs’ securitised portfolios, said, “The rating of microfinance securitisation transactions, like those of other asset classes, is based on the premise that the assignment of receivables constitutes a true sale. Thus, in the event of bankruptcy of the originator, the underlying assets will be beyond the reach of the entity’s creditors. Each transaction is supported by an opinion to this effect from the legal counsel.”
If after selling a securitised portfolio the originator MFI goes bankrupt, the entity holding the securitised pool will find it difficult to recover loans and installments. This is because most MFI-appointed group leaders do recovery work for the MFI that is the originator on a certain relationship. If the owner of a loan portfolio changes, this arrangement may not work. Appointing another agency for recovery would also not be easy, as the loan and installment amounts are quite small.
In that case, should MFIs enjoy higher ratings? Icra clarifies, “We recognise that the servicers’ role is important for a transaction’s ongoing performance, and the prospect of bringing in an alternative service is low, especially in the context of microfinance. Hence, the servicer’s own rating is an important factor in determining the transaction rating. Accordingly, Icra’s rating of securitisation transactions is not completely delinked from the servicers’ ratings.”