HNIs buy securitised micro loans that yield 13-17%.
A few months ago, a big name in the financial world invested Rs 6 crore in securitised loans of micro finance institutions (MFIs). After getting familiar with its various facets, he has now promised to commit a larger chunk, of around Rs 40 crore, in the next issue. Every week, such packets — small and big — of smart money find their way to this instrument.
“People are just wetting their feet. The potential is huge,” says Nikhil Kapadia, CEO (wealth management), Avendus Capital. In the wealth management space, Avendus is the first fund house to have recognised the potential of this instrument as a separate asset class. Several of its clients have shown interest in these products, which are securitised by Chennai-based IFMR Capital.
| SECURITISED MICRO LOANS come in two tranches | |
| SENIOR TRANCHE | |
| Tenure | 4-6 months |
| Credit rating | P1+ |
| Yield | 13-14% |
| JUNIOR TRANCHE | |
| Tenure | 10 months |
| Credit rating | BBB- |
| Yields | 17% |
IFMR aggregates loans from MFIs, securitises them, and sells these to institutional and wealthy investors. “Almost every week, we come out with these issues. Size could vary from a small Rs 2 crore to Rs 40 crore. We have seen HNIs, either individually or in groups, participating in a small way,” notes Meenal Madhukar of IFMR Capital.
The securitised loans come in two tranches. The senior tranche consists of shorter-tenure papers that earn yields of 13-14 per cent for investors. These have a rating of P1+, which is considered safe. The senior tranche comes with a maturity of four to six months. The junior tranche has a lower credit rating and, hence, yields higher returns of up to 17 per cent. The tenure is also slightly higher, of around 10 months.
Typically, there is no tax deducted at source for these products. “After the senior tranche gets repaid, the collateral cover for the junior tranche increases, taking the rating for this product higher,” says Kapadia. “Therefore, people interested in higher yield opt for the latter,” he adds.
According to him, once the investors understand the product, they begin to like it, because the returns are better than those offered by debt funds and other fixed income products, which today yield less than 10 per cent on a post-tax basis.
At present, IFMR is in talks with at least one wealth management company to market these products. It has also been making presentations to other prospective investors to create awareness about this emerging asset class. Securitised loans are a win-win proposition for both investors and MFIs. Since most MFIs in India operate as non-banking finance companies (NBFCs) that do not take deposits, these do not have direct access to household savings. Securitisation seeks to bridge this gap.
Royston Braganza, CEO of Grameen Capital, which is involved in funding micro-lenders, says the securitisation process is creating a new investment grade asset, that is rated, for investors. “For MFIs, this is creating liquidity. In a scenario where bank-lending is shrinking, securitisation is becoming a viable and necessary option for institutions.”
IFMR Capital, the leader in securitisation and repackaging of micro loans, comes out with these instruments at regular intervals. The company has completed six capital market transactions involving securitisation of micro loans totalling Rs 186 crore. Last month, it securitised a “multi-originator” portfolio of 49,881 loans, with a total value of Rs 51 crore.
The securitisation involved seven MFIs: Asirvad Microfinance , Disha Microfin , Mimoza Enterprises Finance, Satin Creditcare Network, Suryoday Micro Finance, SV Creditline and Utkarsh Micro Finance.
But, the latest draft guidelines of the Reserve Bank of India (RBI) on securitisation, which specify a minimum holding period threshold of 24 months, can throw a spanner in the wheels of the fledgling market, says Grameen’s Braganza.
According to industry estimates, the Indian MFIs are estimated to have an active borrower base of 48.7 million and a portfolio of Rs 25,100 crore by 2012. An IFMR report says: “To support this growth, both large and small MFIs will require a cumulative equity capital of Rs 2,170 crore and debt capital of Rs 22,100 crore. This demand makes the sector attractive for investment.”
