Microloan securitisation volume see recovery in 9M FY22: ICRA

January 25

Microloan securitisation volumes have seen a recovery, increasing to around ₹6,200 crore in the first nine months (9M) of FY2022 compared to around ₹1,900 crore in 9M FY2021, according to ICRA. However, the volume in the 9M FY22  remains much lower than the pre-Covid period (of around ₹29,000 crore in FY2020).

As per note by the credit rating agency, the Q4 securitisation volume  (January-March 2022), 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 of raising funds through securitisation for the near term as investors remain wary of the borrowers’ performance given the loan’s unsecured nature.

Before the pandemic, securitisation contributed between 30-40 per cent of the disbursements for non-banking finance company (NBFC)-micro finance institutions (MFIs). But it has seen its share drop to sub-20 per cent post-pandemic with fewer entities able to tap the securitisation market, the agency said.

Share of microloan securitisation in overall securitisation has also declined from a peak share of 15 per cent in FY2020 to 10 per cent in FY2021 and around 8 per cent in 9M FY2022, as per ICRA’s assessment.

Abhishek Dafria, Vice President and Group Head-Structured Finance Ratings at ICRA, said, “Historically, the microfinance sector has performed well except for 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.”

However, the sector has shown strong resilience in the past, which has been again seen with a healthy bounce back in collections post the first and second pandemic wave.

“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 microloan pools. While direct assignment transactions had a dominant share, the share of PTCs (pass through certificates) in microloan 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,” Dafria said.

Collections bounce back

The collection efficiency seen in the ICRA-rated microloan pools declined during the moratorium period (April-August 2020) and again in Q1 FY2022 due to the second wave. However, the collections witnessed a healthy bounce back in the subsequent period displaying the borrower resilience, noted ICRA.

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,” ICRA said.

Shift in ticket size

Gaurav Mashalkar, Assistant Vice President and Sector Head, ICRA, observed that post-pandemic, there has been a shift to higher ticket size and loan cycle parameters of pools evaluated by the agency.

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,” Mashalkar said.

While roll back from deeper delinquent buckets has historically been a challenge given the inability of the borrower to service multiple instalments, he noted that there has been a recovery seen in the loss cum 30 plus days past due bucket for pools rated in CY2020, which is a positive.

Also, the increased usage of credit bureaus, which acts as a deterrent for borrowers not to default on payments to any NBFC-MFI since that would render them ineligible for future loans, is a supporting factor.