NCDs and Securitization: Popular Routes for Debt Funding

Microfinance Focus, June 23, 2010: Microfinance institutions in South Asia have been exploring innovative debt financing deals to support their robust growth. They have increasingly been tapping on Non-Convertible Debentures to create a diversified lender base and have raised significant foreign debt funding via this instrument. Leading players like SKS, Grameen Koota and Spandana Sphoorthy have raised hundred crores worth of funds by way of issuing NCDs.

For investors, NCDs still remain good option given the Fixed Income scenario. Essentially, these NCDs are more attractive as the companies typically offer 2-4 per cent higher returns than the fixed deposits. Moreover, they attract no TDS on interest as they would be issued in a dematerialized form and listed as a security in the National Stock Exchange.

Last year the Indian microfinance industry carried out its first multi-originator securitization deal originated by Asirvad Microfinance Pvt Ltd, Sahayata Microfinance Pvt Ltd, Satin Creditcare Network Ltd, and Sonata Finance Pvt Ltd. The Rs. 308 million (US$6.5 million) transaction is backed by around 42,000 micro-loans of its originators.

At MCCM, representatives from eminent financial advisory firms dissected these debt financing deals and discussed the future relevance of alternative financing structures. Mr. Eric Savage, Managing Director of Unitus Capital said, “Diversification is critical for any business, and it was evident in the financial collapse two years ago. Indian microfinance was fortunate that the bulk of its funding from commercial banks which was not hit very hard by the crisis. Nevertheless it is important to have diversification as a buffer against any shocks in the future.”

Meenal Madhukar, IFMR briefed the audience about the operations of IFMR. “We are looking for creating new investment base for smaller and high quality MFIs. We have been responsible for the very first Mutual Fund investment in India. We have also invested in world’s first multi-originated securitization deal.” Elaborating on the reasons which are keeping Mutual Fund investors away from microfinance, she said, “Microfinance having a double bottom line leaves the investors confused in terms of assessing it accurately and prudently. No one has the time to understand the complex ratings.”

Speaking about the Non-Convertible Debentures, Dr. Gouri Sankar, Standard Chartered Bank said, “The founding of NCDs leads to one more funding route for the maturing microfinance sector. It gives better return to the investors, compared to few of the other structures.”  Rating challenges, regulatory approvals and volatility of foreign exchange market were some of the issues the NCD route faces as highlighted by Mr. Sankar.

Shams Zaman, Senior Vice President, Global Markets, Citi Bangladesh discussed BRAC’s securitization, the world’s first AAA rated micro-rated securitization. “From the perspective of Citi, BRAC had a very impressive cutomer-driven operation that Citi felt was investment worthy” he said.

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