Note ban impact: Rising defaults by MFI borrowers turn investors cautious

Securitisation volumes drop 20% in F&17 after two years of rapid growth

The amount raised by micro finance institutions (MFIs) through securitisation was 20 per cent lower in 2016-17 as compared to the previous year, as investors turned cautious about taking exposure on MFIs hit by loan defaults after demonetisation.

MFIs, including some erstwhile MFIs that turned small finance banks, raised Rs 7,150 crore in 2016-17, down from Rs 9,000 crore 2015-16.

The impact of demonetisation on microfinance securitisation volumes has been severe, according to Icra.

This fall comes after two years of rapid growth. The securitisation volumes had grown 80 per cent to Rs 9,000 crore in FY16.

Vibhor Mittal, Head-Structured Finance at Icra, said "The dip in micro loan securitisation volumes is primarily due to the impact of the demonetisation event (in November 2016) on the portfolio of most MFIs."

Investors also adopted a wait-and-watch approach for this asset class on the back of a rapid increase in the portfolio at risk (PAR) numbers in the softer delinquency buckets, and the uncertainty around the portfolio performance going forward.

Securitisation is a process by which a company (MFIs) clubs its different financial assets/debts to form a consolidated financial instrument that is issued to investors.

Icra said the impact of the unexpected demonetisation event also put spotlight on high reliance on cash for both collections and disbursements to MFI borrowers. The unavailability of legal tender with the borrower severely impacted loan repayments.

Additionally, local political interference and rumours of loan waiver in some areas of the country led to further disruption in the collection process. This was primarily seen in states where local body or assembly elections were due, Icra said.

The performance of all Icra-rated MFI transactions was strong till October 2016 with monthly and cumulative collection efficiency in the 98-100 per cent range.

However, post demonetisation, the monthly collection efficiency fell significantly to 91 per cent in November and further to 82 per cent in December 2016.

While the collections have improved in January and February 2017, several borrowers are only paying partial instalments due to which the PAR delinquency numbers continue to increase.