ICRA: Financing through securitisation may continue to be challenging for microfinance entities; nonetheless, collections for pools originated post pandemic remain satisfactory

25 Jan 2022 , 11:36 AM

Micro loan securitisation has seen a dip post March 2020 driven by lockdowns due to the pandemic and the subdued investor appetite seen for this asset class subsequently. The fall in volumes was sharp in FY2021 in line with the fall seen in overall securitisation volumes. However there has been a recovery in absolute terms with micro loan securitisation volumes standing at around Rs. 6,200 crore in 9M FY2022 as compared to around Rs. 1,900 crore in 9M FY2021, though it still remains much lower than the pre-Covid period (~Rs29,00 crore in FY2020).

As per an ICRA note, the securitisation volumes in Q4, which should have otherwise seen a healthy improvement, could be impacted by the concerns around the third wave of Covid infections that may affect the repayment capabilities of the borrowers who have a marginal financial profile.

Also, microfinance entities would continue to see challenges in terms of raising funds through securitisation for the near term as investors remain wary of the performance of the borrowers given the unsecured nature of the loan. Securitisation which prior to the pandemic contributed between 30-40% of the disbursements for NBFC-MFIs has seen its share drop to sub-20% post-pandemic with fewer entities able to tap the securitisation market. Share of microloan securitisation in overall securitisation has also declined from a peak share of 15% in FY2020 to 10% in FY2021 and around 8% in 9M FY2022.

Says Mr. Abhishek Dafria, Vice President and Group Head – Structured Finance Ratings at ICRA, “Historically the microfinance sector has performed well except for certain geography specific issues which have impacted certain entities. Nonetheless, major disruptive events such as demonetisaton in 2016 and the spread of the pandemic post March 2020 do result in a stress on the entire microfinance industry reflected in higher delinquencies and write-offs for the entities. The sector has, however, shown strong resilience in the past which has been again seen with healthy bounce back in collections post the first and second wave of the pandemic. The third wave of Covid infections has been least disruptive so far though until the numbers start to taper, investors may remain wary of investing in micro loan pools. While direct assignment transactions had a dominant share, the share of PTCs in micro loan securitisation has been rising post the pandemic as investors prefer having credit enhancements in the structure to absorb higher-than-expected losses in the pool.”

The collection efficiency seen in the ICRA-rated micro loan pools witnessed a decline during the moratorium period (April to August 2020) and again in Q1 FY2022 due to the second wave. However, the collections witnessed healthy bounce back in the subsequent period displaying the borrower resilience. Further a larger share of live ICRA-rated pools  has a higher share of portfolio originated post moratorium which has performed better as the microfinance entities have been disbursing to borrowers with a better credit profile. In the live rated micro loan pools, there has been only one downgrade in rating of senior tranche post the pandemic. For all other transactions, performance has been robust with no loss to the investors after factoring in the credit enhancements in the structure.

Adds Mr. Gaurav Mashalkar, Assistant Vice President and Sector Head, ICRA, “There has been a shift in the ticket size and loan cycle parameters of pools evaluated by us  post pandemic with share of higher ticket size and higher loan cycle loans increasing in pools. This seems to corroborate the portfolio level characteristics of NBFC-MFIs which have been predominantly disbursing to existing borrowers whose finding requirements have increased and who require fresh capital to restart and grow their business.

Investor preference continues to remain for loans which are having nil delinquency as on pool cut-off date which has rendered a significant portion of the pre-pandemic portfolio ineligible and hence the pools evaluated by ICRA continue to consist of newer originated loans which have been less impacted by the pandemic.

Investors have also been cautious while applying geography specific filters. While roll back from deeper delinquent buckets has historically been a challenge for the sector given the inability of the borrower to service multiple installments, there has been a recovery seen in the loss cum 30+ dpd bucket for pools rated in CY2020 which is a positive. Also, the increased usage of credit bureaus which acts as a deterrent for borrowers to not default on payments to any NBFC-MFI since that would render them ineligible for future loans is a supporting factor.”