 "New law restricts securitisation in MFI")
However, the year-end Budget proposal to tax the special purpose vehicle (SPV) involved in the deals held back a number of deals. In addition, the new Reserve Bank of India (RBI) guidelines on securitisation and direct assignment of loan receivables restricted the number of deals.
Last year, sailing through rough waters, the MFI industry managed to strike deals worth Rs 3700 crore (securitisation and direct assignments). This year, the industry is expected to have sold portfolios worth Rs 4,200 crore to banks and other financial institutions, according to data from MFIN (microfinance institutions network).
“The numbers would have been higher but for certain tax related issues which came up post the Budget announcements,” said Alok Prasad, chief executive officer, MFIN.
In the financial year 2011-12, Kolkata-based Bandhan could sell loans worth about Rs 728 crore, but last financial year, it could sell loans worth about Rs 355 crore to banks and financial institutions, according to Chandra Shekhar Ghosh, Chairman and Managing Director, Bandhan. The fall in volume was mainly due to the new RBI guidelines on minimum retention period before securitisation or portfolio sale, he said.
According to Vinod Kothari, director designate, Indian Securitisation Foundation, in the entire non banking finance space, excluding MFIs, deals worth Rs 18000 crore were stuck due to the tax imposed in the Budget.
Most of the securitization transactions take place before the end of a financial year, when banks are in a rush to meet their priority sector lending norm. Banks are required to lend 40% of their loans to agriculture, exports and other weaker sections.
There are two ways by which a MFI offloads its portfolio to banks—securitization and bilateral transaction. In securitisation, the MFI sells a pool of loan to a bank or investor through a special purpose vehicle (SPV), which acts as an intermediary between the two.
The MFI may provide additional comfort to the investor by way of credit enhancement. The MFI collects the loan from the borrowers and transfer it to the SPV, which passes it to the investor. In case of bilateral transaction, there is no SPV involved, and the loans are directly transferred from MFI to banks books.
The latest Budget imposed a distribution tax of 25-30% on distribution income from the SPV involved in the securitisation deals.
On direct assignment, the RBI, on 7 May 2012, had put out the final guidelines on securitisation and direct assignment of loan receivables. Under the guidelines, no credit enhancement is permitted for these transactions.
Also, RBI imposed Minimum Holding Period (MHP) and Minimum Retention Requirement (MRR) before securitisation or portfolio sale.
“Given the prohibition on credit enhancement, the investing banks will be exposed to the entire credit risk on the assigned portfolio, which most banks may not be comfortable with. Hence the volume of such assignment transactions is expected to be severely affected,” according to a credit rating agency ICRA.