The Securitization of Microfinance Assets
Over the last several decades securitizations have become an increasingly conspicuous part of the international financial marketplace. (See the U.S. mortgage market.) A securitization is essentially a bundled group of assets with relatively predictable future cash flows that are transferred off the books of the original holder to an independent entity known as a special purpose vehicle (SPV). The SPV sells the rights to the future cash flows in the form of a security which provides the seller with a decreased risk profile and an influx of immediate capital at a relatively low cost; and they provide the purchaser with exposure to the desired market and cash flows over time. The resulting securities – considered structured products – can be rated, organized by tranches, and in the vast majority of cases are bankruptcy-remote. As standardized instruments, they are tradeable and are typically sold to third parties such as banks, mutual funds and insurance companies. Either the originator or an outside entity acts as the servicer, i.e. providing the administrative support necessary to maintain the cash flows, and so long as the assets mature in a predictable fashion everyone wins. Securitizations are used to meet funding requirements of various institutions, including microfinance institutions.
As the growing asset size of microfinance has put pressure on the balance sheets of microfinance institutions, some have resorted to off-balance funding methods in order to sustain growth rates. (Collateralized debt obligations (CDOs) are another form of off-balance sheet financing). Microfinance securitization is generally characterized by the same process as other securitization products. However, unlike most other industries, in microfinance the originator, i.e. the MFI, often must also serve as the servicer because the collection of receivables is contingent upon manual labor and the maintenance of relationships in often remote locations. But there is some debate as to whether MFI-based loan bundles are truly bankruptcy remote. Historically speaking there have been instances where the transfer of microloans from one MFI to another, whether
through bankruptcy, a merger, or any other impetus, has resulted in significant confusion amongst borrowers and a corresponding decrease in the robustness of receivables. (In Bolivia. for example, when an NGO-MFI merged with another organization large numbers of borrowers assumed that their debts had been liquidated and stopped paying.)
Microloan securitizations are also unique because they are based on loans which often utilize ‘group credit mechanisms ’ to offset a lack of collateral amongst borrowers in order to minimize delinquency. While generally successful, in rare occasions grievances between lenders and borrowers can result in uniform refusal to pay and widespread delinquencies within a given portfolio.
In order to offset these risks – and others not discussed here – MFIs often decrease their security’s risk profiles by providing additional loans as collateral that can be utilized to offset non-performing loans (NPLs), serving as the owner of a de facto lowest tranche which will absorb the first round of delinquencies; or in some cases even setting aside cash to cover any initial losses.
Such idiosyncrasies notwithstanding, MFI-originated securities have become an increasingly ubiquitous instrument in the financial marketplace. Historically, securitization of loans to MFIs can be traced to 2006 when Morgan Stanley arranged and placed the first such securitized transaction. This was followed in 2007 with a rated USD 110.00 securitization that attracted wider participation with 21 investors. More recently such major organizations as Grameen Koota /IFMR Capital, SKS Microfinance. and Equitas – among many others – have packaged and sold large pools of microloans.
Unlike most ‘traditional’ securitizations attracting international participation, the more recent products have seen the most robust sales in domestic markets; however with approximately 8.7 trillion rupees worth being sold in India alone in 2009/2010, microloan securities have certainly arrived. Further recognition of securitization as a potential source of financing for microfinance institutions, CGAP has published a Technical Guide on Securitization that includes definitions, standard agreement, tips and negotiating conditions.Source: www.aboutmicrofinance.com
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