Microfinance loan securitisation grows over two-fold YoY in Q1FY23

Better recoveries, adequate credit enhancements spark investor confidence

Securitisation of loans extended by microfinance entities (MFIs) more than doubled year-on-year to Rs 3,500 crore in the June 2022 quarter of the current financial year, as investors reposed confidence on improved recoveries and adequate credit enhancements.

According to rating agency Icra, the securitisation or sale of existing micro-finance loans by issuing pass-through certificates (PTC) and direct assignment (DA) stood at Rs 1,460 crore in Q1FY22. This review covers transactions by non-banking finance companies working as microfinance institutions (MFIs).

There was a healthy bounce back during the second half of FY2022 and the trend has continued in Q1FY23. Micro loan securitisation was the worst hit due to Covid-19, with a steep drop in volumes to Rs 7,100 crore in FY21.

However, securitisation volumes doubled to Rs 14,540 crore in FY22, though on a lower base. They are still at about half the volumes seen in FY19 and FY20. That said, almost 57 per cent of the year’s volumes came in Q4FY22, the rating agency said.

Investor confidence improved when it was clear that the impact of the second wave on the asset quality of originators was not carried over to the third wave.

Securitisation remains a key funding tool for NBFC-MFIs, with its share in the funding mix rising to 27 per cent in Q4FY22. However, this is still below pre-pandemic levels.

Gaurav Mashalkar, Assistant Vice President and Sector Head, ICRA, said with each Covid wave, NBFC-MFIs have been better equipped to handle collections, supporting meaningful reductions from the peak delinquencies.

NBFC-MFIs have also been disbursing to stronger borrowers post pandemic and have tightened focus on collections as disbursements for FY21 and Fy22 continued to be lower, which can be corroborated by the performance of pools rated post March 2020.

Icra has rated over 500 micro loan PTC transactions, the performance of which has been healthy. The transactions downgraded in the past were largely affected by demonetisation. Despite being the worst affected asset class post pandemic, the pools bounced back strongly with collection efficiency close to 100 per cent.

The rising share of DA in micro loan securitisation signals greater investor comfort. Suggestions that DA volumes would be impacted by revised securitisation guidelines that mandate higher due diligence are unfounded, Mashalkar said.