The securitisation of loans given by microfinance entities (MFIs) has seen a healthy bounce back during the second half of FY2022 and the trend has continued in Q1 FY2023. Micro loan securitisation was the worst hit due to the COVID-19 pandemic, with a steep drop in volumes to Rs. 7,100 crore in FY2021. However, the micro loan securitisation volumes doubled to Rs. 14,540 crore in FY2022, albeit on a lower base; it still remains about half of the volumes seen in FY2019 and FY2020. Almost 57% of the year's volumes, though, came in Q4 FY2022. The momentum has been strong in Q1 FY2023, with micro loan securitisation of about Rs. 3,500 crore seen as against Rs. 1,460 crore in Q1 FY2022. While the impact of the second wave was witnessed on the asset quality of originators, no major impact was seen during the third wave that improved the confidence of the investors. Securitisation remains a key funding tool for NBFC-MFIs, with the share of securitisation in the funding mix increasing to 27% in Q4 FY2022; however, this remains below pre-pandemic levels.
Says Mr. Abhishek Dafria, Vice President and Group Head - Structured Finance Ratings at ICRA, "The microfinance sector has historically shown healthy asset quality barring major events like demonetisation and has seen robust growth in its portfolio in the period of FY2019 to FY2020. After the impact of the pandemic, the sector has again shown resilience and the ability to bounce back. Due to increased collection efforts, regulatory support in the form of restructuring and moratorium, and reduced concerns about the pandemic impact, investors are once again considering micro loan securitisation, particularly to support banks' priority sector lending targets."
While there was a shift towards pass-through certificates (PTC) post the first wave given the safety of credit enhancement available in the structure, the share of direct assignment (DA) has been steadily increasing, with the share of DA at 83% of total micro loan securitisation in Q4 FY2022. Another encouraging sign is that the number of originators increased in Q4 FY2021, with many smaller originators also tapping the market. With increasing disbursements and increased investor confidence, ICRA expects micro loan securitisation volumes to show healthy momentum in the current fiscal. The change in the RBI framework for micro loans and investor outlook, as well as the performance of the loans originated under the new framework (once they are securitised), would be a key monitorable.
ICRA has rated over 500 micro loan PTC transactions, and the performance of these transactions has been healthy. The transactions downgraded in the past were largely affected by demonetisation. Despite being the worst affected asset class post the pandemic, the pools have shown a strong bounce back with collection efficiency close to 100%. The available credit enhancement, as well as the ultimate principal promise for most of these pools has also meant that, despite a dip in collections seen on April 21 and May 21, none of the ICRA-rated pools were downgraded during the pandemic except for one transaction where there were originator-specific issues. In fact, these rated pools have demonstrated robust performance and while the number of rating upgrades was lower in FY2021 on account of uncertainty in the macro environment as well moratorium in collections for H1, the share of rating upgrades improved in FY2022 and Q1 FY2023.
Adds Mr. Gaurav Mashalkar, Assistant Vice President and Sector Head, ICRA, "This is due to the improvement in the collections as well as the presence of adequate credit enhancements in the structures. With each COVID wave, the NBFC-MFIs have been better equipped to handle the collections, supporting meaningful reductions from the peak delinquencies. Further, NBFC-MFIs have been disbursing to better profile borrowers post pandemic and have tightened focus on collections as disbursements for both FY2021 and FY2022 continued to be lower, which can be corroborated by the performance of pools rated post March 2020. The increasing share of DA in micro loan securitisation signals greater investor comfort and suggestions that micro loan DA volumes would be impacted by revised securitisation guidelines which mandate higher due diligence have been unfounded."