Chennai-based Equitas Micro Finance India Private Limited has securitised loans worth over Rs 100 crore with financial institutions including UTI Mutual Fund and HDFC Bank. The transaction also marks the biggest ever securitisation deal in terms of size in the Indian microfinance space.

About 1,05,422 micro credit loans originated by Equitas have been securitised with leading financial institutions. IFMR Capital was the arranger for the deal and has also co invested in the transaction.

Securitisation is the process through which financial institutions will be able to pool the receivables from loans and sell the same to third parties in the form of banks, mutual funds and insurance companies. This is the most common practice by which non-banking finance companies raise money.

So far, micro finance institutions have been raising money via securitisation through banks and off late mutual funds and wealth management firms have been showing interest in the sector. By diversifying their source of capital, micro finance institutions would be able to bring down their cost of funds.

Gamma Pioneer IFMR Capital 2010, the Special Purpose Vehicle created for the purpose has issued three tranches of securities rated by Crisil. The subscribers for the different tranches were UTI MF, HDFC Bank and Reliance Capital.

“This is the largest microfinance securitisation in the sector till date. Microfinance receivables are increasingly being treated on par with other asset classes. This transaction also affirms that capital markets access for high quality microfinance institutions with sound systems and origination processes is indeed robust” Sucharita Mukherjee, chief executive officer of IFMR Capital said in a statement.

In the deal, Equitas provides cash collateral of 9.4 per cent of the pool principal, while the structurer, IFMR Capital, has invested in the subordinated junior tranche.

The cash collateral and the subordination of payments to junior tranche in the waterfall mechanism ensures that the senior investor is protected against losses up to Rs. 24.16 crore.

Meanwhile, the first losses are met from the cash collateral provided by the originator and the second losses are borne by the subordinated junior tranche investors.

“For Equitas, this would also mean a lower cost of funds as and when the market for such rated securitised instruments sufficiently expands. It could then reduce the cost to the ultimate borrowers,” chief operating officer at Equitas S Bhaskar said.