A recent micro-loan securitization, 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 deal was structured by IFMR Capital, which operates as a financial guaranty company for sectors impacting low-income households. IFMR co-invested in the junior tranche of the securitization.
The transaction has been structured into three separately rated tranches to match investor risk-return profiles. This type of structure expands the range of institutions that can invest in the asset class.
CRISIL, a subsidiary of Standard & Poor's, rated the tranches ‘P1+’ (the highest possible rating for short term securities), ‘AA’ and’ BBB.’
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.
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 securitization also provides banks an attractive way to increase their investment in the microfinance sector through rated, tradable securities.
As the market develops for micro-loan backed securities, more microfinance institutions will be able to access mainstream capital markets. This will allow them to deliver more affordable financial services to clients who have traditionally been excluded from the financial system.