Spate Of Defaults In Microfinance Securitisation Transactions Raises Concern in India

Wednesday, April 4, 2018

By India Ratings

Recent defaults in seven microfinance securitisation transactions with an initial senior-class pass through certificate amount of Rs 849.34 crore and an initial rating predominantly in the ‘A’ category have again highlighted the need for greater caution in evaluating the microfinance loan securitisation, according to India Ratings and Research.

As the principal payment is promised on the final maturity date, losses were getting postponed. These losses accumulated in the range of 2.8-3.1 percent for senior class and nearly 100 percent for the junior class of Rs 45.73 crore, which was rated in the ‘BBB’/‘BB’ category.

The similarity of borrowers from microfinance institutions (MFIs), in terms of their vulnerability to socio political events, financial literacy and credit behaviour, renders the microfinance sector susceptible to any kind of adverse idiosyncratic event and more so in case of a system-wide event such as demonetisation.

Thus, the microfinance sector has shown a volatile loan performance despite a low average historical default rate. India Ratings highlighted the volatility in the performance of MFI loans compared with other asset classes in its report PSBs’ Reliance on Portfolio Acquisition from NBFCs.

Photo courtesy of Satish Krishnamurthy.

Source: Bloomberg Quint (link opens in a new window)

lending, microfinance