Microfinance loan securitization more than doubled year-over-year in Q1FY23

Securitization of loans made 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 were confident in improving collections and adequate credit enhancements.

According to rating agency Icra, securitization or sale of existing micro-finance loans through issuance of transfer certificates (PTC) and direct assignment (DA) amounted to Rs 1,460 crore in Q1FY22. This examination covers transactions carried out by non-banking financial companies acting as microfinance institutions (MFIs).

There was a healthy rebound in the second half of FY2022 and the trend continued into the first quarter of FY23. Micro-loan securitization was hit hardest due to Covid- 19, with a sharp drop in volumes to Rs 7,100 crore in FY21.

However, securitization volumes doubled to Rs 14,540 crore in FY22 but on a lower basis. They are still around half of the volumes seen in fiscal 2019 and 2020. That said, nearly 57% of the year’s volumes were recorded in Q4FY22, the rating agency said.

Investor confidence improved as it became clear that the impact of the second wave on originator asset quality had not carried over to the third wave.

Securitization remains a key funding tool for NBFC MFIs, with its share in the funding mix reaching 27% in Q4FY22. However, this remains below pre-pandemic levels.

Gaurav Mashalkar, Assistant Vice President and Area Head, ICRA, said that with each wave of Covid, NBFC MFIs have been better equipped to handle collections, sustaining significant reductions from peaks in delinquencies.

MFIs-NBFC also disbursed stronger borrowers post-pandemic and focused on collections as disbursements for FY21 & 22 continued to be lower which can be corroborated by pool performance graded after March 2020.

Icra has evaluated over 500 PTC microloan transactions, which have performed well. Transactions downgraded in the past have been largely affected by demonetization. Despite being the most affected asset class post-pandemic, pools have rebounded strongly with collection efficiency close to 100%.

The increasing share of AD in the securitization of microloans signals greater investor comfort. Suggestions that DA volumes would be impacted by revised securitization guidelines that mandate higher due diligence are unfounded, Mashalkar said.

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