The impact of demonetisation on micro-finance securitisation volumes has been severe, according to a study by credit rating agency ICRA.
After two years of rapid growth, the volume of micro loan securitisation transactions witnessed a trend reversal with around 20 per cent dip observed in 2016-17, the agency said.
ICRA’s estimates show that MFIs (including some erstwhile ones that have now become small finance banks) raised nearly ₹5,500 crore through the securitisation route in the first six months of FY17. However, they raised only around ₹1,650 crore in the second-half of the fiscal, resulting in total securitisation volumes of around ₹7,150 crore for the full year.
In comparison, MFI securitisation volumes had increased by 80 per cent to around ₹9,000 crore in FY16. Securitisation involves pooling of assets such as micro loans, and creation and issuance of securities backed by cash flows from the underlying assets.
Vibhor Mittal, Head – Structured Finance, ICRA, said, “The dip in micro loan securitisation volumes is primarily due to the impact of the demonetisation event on the portfolio of most MFIs.
“Investors also adopted a wait-and-watch approach for this asset class on the back of a rapid increase in the portfolio at risk (PAR) numbers in the softer delinquency buckets, and the uncertainty around the portfolio performance, going forward.”
The unexpected demonetisation also had a more pronounced impact on this asset class due to high reliance on cash for both collections and disbursements to MFI borrowers.
ICRA observed that the unavailability of legal tender with the borrower resulted in loan repayments being severely impacted. Additionally, local political interference and rumours of loan waiver in some areas of the country led to further disruption in the collection process. This was primarily seen in States where local body or assembly elections were due.
The performance of all ICRA-rated MFI transactions had been strong till October 2016 with monthly and cumulative collection efficiency at 98-100 per cent.
However, post demonetisation, the monthly collection efficiency levels of the pools declined significantly in the months of November and December 2016 to 91 per cent and 82 per cent, respectively.
While the collections improved in January and February 2017, ICRA said a large segment of the borrowers are only paying partial instalments due to which the PAR delinquency numbers continue to increase.
Disbursements affectedObserving that post demonetisation, there has also been a notable slowdown in loan disbursements, the agency reasoned that this was due to lack of currency availability in the initial period, and on account of MFIs becoming more cautious while offering incremental loans, especially in geographies where collections are low.
“Due to sharp decline in disbursements, additional funding requirement for MFIs also reduced. This further took a toll on securitisation volumes, as around 25 per cent of incremental funding requirement of MFIs was being met through the securitisation route,” said the ICRA study.
Further, a significant portion of MFI securitisation was being carried out by entities that have now converted to or are in the process of converting to small finance banks (SFBs).
According to ICRA estimates, nearly 45 per cent of the total MFI securitisation volumes (including bilateral assignments) were from such entities.
Majority of the investors in securitisation transactions were banks, with their prime motive for investing in these transactions being to meet their priority sector lending targets. As more entities convert to SFBs, their contribution to MFI securitisation volumes should diminish significantly.