Post-Andhra ordinance developments also halt traditional loan assignment transactions.
Investors are shying away from securitised loans of micro-finance institutions (MFIs), as the ordinance issued by the Andhra Pradesh government has slowed recoveries, creating uncertainty around the underlying portfolio. A third of the country’s micro-finance lending is in AP. Securitisation is the process through which MFIs pool the receivables from loans given to their customers and sell these to third parties like banks, insurance companies and mutual funds. Unlike the traditional loan portfolio sale or assignment, in this process the MFI portfolio is rated and converted into standardised securities, which can be traded more easily.
Securitised loan products of MFIs were emerging as a good investment option, as they offered returns of 9-12 per cent per annum.
The size of this market was pegged at a little over Rs 1,000 crore.
However, the issue of these products has stopped for the present, officials said. “In view of the uncertainty after the AP ordinance, it has become difficult for MFIs to sell securitised loans. The pace of such deals has reduced,” said D R Dogra, managing director and CEO of CARE Ratings.
After the state government passed an ordinance in mid-October, MFIs have moved to a monthly repayment cycle from a weekly one. This has resulted in a sharp drop in collections in the southern state. Crisil estimates collections in Andhra have plummeted to below 20 per cent, from nearly 99 per cent prior to the ordinance.
“We last rated an MFI loan assignment transaction in October. Since then, we have not received any request for rating such products,” said Kalpesh Gada, head- structured finance, Icra. “MFI originators might possibly be wanting to securitise their loan receivables or bilaterally assign them, but banks are mostly in a wait and watch mode,” he added.
The traditional loan assignment transactions, in which MFIs sell their portfolios to banks, have also been severely hit.