The momentum in securitisation of loans given by microfinance entities (MFIs) has been strong in Q1 FY23, with securitisation of about ₹3,500 crore micro loans seen as against ₹460 crore in Q1 FY22, signalling the return of investor confidence in this segment, according to ICRA.

Securitisation of loans given by MFIs has seen a healthy bounce back during H2FY22 and the trend has continued in Q1 FY23, the rating agency said in a report.

Momentum of loan securitisation

ICRA assessed that micro loan securitisation, which was worst hit due to the COVID-19 pandemic, doubled to ₹14,540 crore in FY22, albeit on a lower base.

However, the micro loan securitisation volumes in FY22 still remains about half of the volumes seen in FY19 and FY20.

“Almost 57 per cent of the year’s volumes, though, came in Q4 FY22. The momentum has been strong in Q1 FY23.

“...While the impact of the second wave was witnessed on the asset quality of originators, no major impact was seen during the third wave that improved the confidence of the investors,” per the report..

ICRA noted that securitisation remains a key funding tool for NBFC-MFIs, with the share of securitisation in the funding mix increasing to 27 per cent in Q4 FY22; however, this remains below pre-pandemic levels.

Abhishek Dafria, Vice President and Group Head - Structured Finance Ratings, ICRA, observed the microfinance sector has historically shown healthy asset quality barring major events like demonetisation and has seen robust growth in its portfolio in the period of FY19 to FY20.

Impact of Covid-19

“After the impact of the pandemic, the sector has again shown resilience and the ability to bounce back. Due to increased collection efforts, regulatory support in the form of restructuring and moratorium, and reduced concerns about the pandemic impact, investors are once again considering micro loan securitisation, particularly to support banks’ priority sector lending targets,” he said.

The agency noted, while there was a shift towards pass-through certificates (PTC) post the first wave given the safety of credit enhancement available in the structure, the share of direct assignment (DA) has been steadily increasing, with the share of DA at 83 per cent of total micro loan securitisation in Q4 FY22.

Another encouraging sign is that the number of originators increased in Q4 FY21, with many smaller originators tapping the market.

With increasing disbursements and increased investor confidence, ICRA expects micro loan securitisation volumes to show healthy momentum in FY23.

The change in the RBI framework for micro loans and investor outlook, and the performance of the loans originated under the new framework (once they are securitised), would be a key monitorable, the agency said.

Despite being the worst affected asset class post Covid-19, the pools have shown a strong bounce back with collection efficiency close to 100 per cent, ICRA said.

Performance of ICRA-rated pools

The agency emphasised that available credit enhancement and the ultimate principal promise for most of these pools has meant that, despite a dip in collections seen in April 21 and May 21, none of the ICRA-rated pools were downgraded during Covid-19 except for one transaction where there were originator-specific issues.

In fact, these rated pools have demonstrated robust performance and while the number of rating upgrades was lower in FY21 on account of uncertainty in the macro environment as well as moratorium in collections for H1, the share of rating upgrades improved in FY22 and Q1 FY23.

Gaurav Mashalkar, Assistant Vice President and Sector Head, ICRA, said: “With each Covid wave, the NBFC-MFIs have been better equipped to handle the collections, supporting meaningful reductions from the peak delinquencies.” 

Further, NBFC-MFIs have been disbursing to better profile borrowers and have tightened focus on collections as disbursements for both FY21 and FY22 continued to be lower, which can be corroborated by the performance of pools rated post March 2020.

Mashalkar said the increasing share of DA (direct assignment) in micro loan securitisation signals greater investor comfort and suggestions that micro loan DA volumes would be impacted by revised securitisation guidelines, which mandate higher due diligence have been unfounded.