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.