Micro finance institutions (MFIs) are securitising the loans given to the weaker section of the society. These securities are in turn sold to banks, mutual funds and insurance companies. The move is expected to bring down the cost of funds for the MFIs and allow them to diversify their sources of tapping funds.

Chennai-based Equitas Micro Finance India has structured a micro loan pool-backed rated securitisation transaction with the principal amount of pass-through certificates (PTCs or securities) worth Rs 15.7 crore. The securities are rated by Crisil.

Last month, Hyderabad-based SKS Micro Finance also completed a securitisation deal worth Rs 200 crore with ICICI Bank, which allows the bank to purchase loans extended to the weaker sections.

“Traditionally, MFIs in India have to access only banks for debt raising, placing limitations. This transaction would open a new window to the industry to raise debt from those banks not generally participating in funding to MFIs as well as other sources such as the mutual funds and insurance companies,” S Bhaskar, chief operating officer of Equitas Microfinance said.

He added that this would help banks to meet their financial inclusion goals and these securities can offer better yields compared to other commercial papers.

For Equitas, this would also mean a lower cost of funds and when the market for such rated instruments sufficiently expands, the benefit of lower cost could be passed on to ultimate clients, Baskar noted.

“This is definitely a good move by MFIs as there has been no issues with recoveries in this segment. This would ease the access to the funds for them and increase their lendable resources. For the banks, this is an attractive investment option as the yields are high because of the quantum of loan. This would help meet their priority sector targets as well,” S P Singh, chief manager (financial inclusion) of Punjab National Bank said.

“Since these securities are rated, banks are in a better position to buyout these securities. Also, these forms a part of higher category in the priority lending segment of banks,” Anal Jain, managing director, MVA Ventures, which has a $50 million fund to invest in Indian MFIs pointed out.

However, he added, for private equity players these would be negative factor, as they cannot ascertain the exposure of MFIs correctly, since many of these loans gets into the balance sheet of banks rather than MFIs.

About of Rs15.7 crore of microfinance loan receivables of micro-finance institutions have been securitised. Crisil has rated the securitisation transaction assigning. MFIs have disbursed more tahn Rs 100 billion in loans to 15 million borrowers across India