Microfinance Institutions use Women Cluster Loans to Raise Capital

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Microfinance institutions in India are increasingly looking at securitisation of women cluster loans to raise capital as traditional fund channels like banks and private equity ( PE )) have restricted lending to the sector. MFIs prefer to source funds from securitised debts comprising loans to women's groups as robust repayment rates among female borrowers make them less risky to defaults, experts said.

More than a dozen microfinance securitisation deals have taken place over the past two months with many structured around small loans disbursed to women borrowers. Women borrowers are more prudent when it comes to using money received as debt, experts said. Securitisation is a financial practice of pooling various types of contractual debt and selling it as bonds or securities to investors. The principal and interest on the debt, underlying the security, is paid back to investors regularly. It provides access to broader investor base and mitigates credit risk of individual borrowers. Securitised loans are mostly rated that instill confidence among institutional investors. "Repayment rates are as high as 99.5% among women borrowers.

Women cluster loans, many a time, get better credit ratings because of their high repayment rates. This makes the issuance attractive to new age non-banking finance companies , wealth managers and high net worth individuals," said K Paul Thomas, managing director, ESAF Microfinance that is planning to raise money through securitisation deals. Grama Vidiyal raised Rs 118 crore and Grameen Koota raised Rs 72 crore, with women cluster loans comprising 76% of the total capital portfolio. Ashirvad Microfinance raised Rs 8.40 crore with over 90% from securitised debt to women borrowers. Bandhan Microfinance and SKS Microfinance raised funds on portfolios with 65% women participation .

Some others such as Janlakshmi Microfinance and Satin Creditcare also raised funds by bundling woman cluster loans. "Close monitoring and peer pressure prompt women borrowers to repay on time. In general terms, women are good managers of money. They use borrowed funds properly and do not divulge funds like many male borrowers," Thomas said. "Securitisation helps microfinance institutions access cost-effective and reliable funding solutions ," said Kshama Fernandes, chief executive officer, IFMR Capital, a Chennai-based firm that specialises in microfinance securitisation. Securitised debts enable micro-lenders to raise money at 200 to 300 basis points lower rates compared with other sources, an IFMR official said. "NBFCs, select private banks and wealth managers are the main buyers of securitised mincrofinance debt instruments," Fernandes said.

Last year, Andhra Pradesh issued an ordinance capping interest rates charged by MFIs. Post the clampdown , banks, which were traditional self-help group lenders, restricted disbursing money to microfinance companies. non-convertible debentures (NCDs) and securitised debts are the only options MFIs have to raise money in the current scenario, experts said.

In securitisation, MFIs bundle up anywhere between 5,000 and 10,000 micro-loans while structuring a debt paper around it. Once micro loan is lent to one borrower or a group of borrowers, credit rating agencies rate the units taking into consideration the quality of underlying loans and the default risk of issuer. "In case of microfinance, group lending always works better than individual lending. Social collateral , peer pressure and good collection methods reduce defaults significantly . These concepts hold true for women borrowers as well. As a matter of fact, MFIs prefer lending to women groups more than anything else," said Kalpesh Gada, head,structured finance, Icra.


The Economic Times, May 03, 2011