The Hidden Risks behind Microfinance Securitization
- Tuesday, July 6, 2010, 7:15
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By Daniel Rozas and Vinod Kothari,
Microfinance Focus , July 06, 2010 : The Reserve Bank of India (RBI) recently promulgated proposed guidelines for securitization by non-banking finance companies that if implemented, would essentially gut the widespread Indian MFI practice of selling (assigning) and securitizing portions of their portfolios. One of us has already described these consequences in detail. Not surprisingly, this proposal caused alarm in the microfinance community and has generated intensive lobbying efforts with the RBI to modify the ruling. As the RBI considers their case, it should bear in mind another distinguishing characteristic that sets microfinance securitizations apart.
Loan portfolios are sold and securitized for many reasons – high cost of borrowing, limited capital, funding diversification, and so on. One of the significant merits of securitization transactions is that a substantial chunk of the securities issued qualify for top credit ratings – at least AA, often AAA. These ratings are based on the requirement that the transfer of the asset from its originating entity separates the asset from the default risk of the originator. In securitization parlance, this is termed true sale, and such is the dependence of the rating on its validity that securitizations require a legal opinion to insure the requirement is actually met. And it is here that microloans depart from their traditional finance counterparts from which the practice has been borrowed.
The nature of the microcredit “asset”
For property to be considered a transferable asset, it must retain value irrespective of its owner. However, in rare cases, assets have value only when associated with a given entity. Like David Beckham’s foot, such assets can generate cashflow to their owners, but they cannot be independently transferred or sold. In accounting parlance, certain types of goodwill share this distinction – for example, the institutional knowledge of an organization can be very valuable, but it only retains its value so long as sufficient number of long-term staff is retained. Consequently, in the course of liquidation, such assets can be converted to cash only if the entire organization or large parts of it are sold in whole.
This is the case with microloans, which constitute only one financial transaction within the broader ongoing relationship between the borrower and the MFI. Without that relationship, the value of the single transaction becomes highly discounted by the borrower – simply put, she has no incentive to continue repayments to an institution that has ceased issuing new loans, let alone failed outright. In the seminal book The Economics of Microfinance, Jonathan Murdoch argues that this incentive “is the reason why maintaining the appearance of stability is important for lenders.”[i]
Besides the theory, there is also significant field evidence demonstrating the strength of this effect. For example, when rumors began to spread among borrowers of an NGO-MFI in Bolivia that it was closing, clients assumed their debts had been cancelled and stopped paying. In reality, it was only merging with other NGOs to form Eco Futuro, and to convince borrowers to continue repayments, the staff not only had to explain that the branch & loan officers would remain in place, but also had to display signage of both the NGO and Eco Futuro for some time.[ii]
If healthy, well-performing MFIs encounter such obstacles in the course of a merger, the problem is many times compounded when an MFI is failing. In fact, a study of MFI failures by one of the authors demonstrated that, absent other factors, such as loans with physical collateral, creditors rarely succeed in recouping any of their investments by liquidating a failed MFI.
MFIs and Servicer Migration
The same dynamic that makes it difficult to collect repayments from a failed MFI’s clients, also figures in attempts to transfer portfolios of still-active MFIs. In securitizations, it is common to distinguish between the origination, funding and servicing of a financial asset. The originator is the party that creates the asset. All subsequent interactions with the borrower – collections, information, borrower relationships, problem resolution, etc., are collectively termed “servicing.” For many financial assets, the origination and servicing can be divorced without causing a loss to the asset value. For example, in prime mortgages, it is common for loans to be originated by a community or local bank, sold off to a larger bank that aggregates thousands of such loans and then sells them off to capital markets through securitization. In such transactions, the servicing function is regularly outsourced to a third party. This can be done successfully because servicing practices are fairly standardized, and the borrowers continue to pay their periodic installments regardless of who the current owner of the loan is. There is no need for the originator to maintain a continuing affinity with the borrowers, as this loan, or at least its servicing component, is not “relationship-based.”
Even in cases where securitized loans remain with the originating lender, investors reserve the right to execute such transfers, termed servicer migrations, later in the loan’s life. Such migrations are especially common when loans fall into distress and are transferred to servicers that specialize in delinquent loans.
However, in the case of microfinance, even if the problem of borrower incentives described above can be resolved, the operational difficulty of executing such a migration still remains. Most microfinance loans are created, nurtured, and serviced by the field officer who maintains a regular franchise with the borrower. Collection of microfinance receivables in most jurisdictions is not based on technology – it is based on manual efforts. Of course, MFI loan officers are often internally replaced due to employee turnover and other reasons. But doing so for an entire loan portfolio at once and without any support from the previous servicer suggests an exercise that is as difficult as it is expensive.
In fact, no servicing migration has ever been successfully carried out in the microfinance world. One notable case where it has been tried is ICICI Bank’s attempt to transfer the servicing of some of its partnership loans in response to the crisis in the Krishna district in Andhra Pradesh in 2006.[iii] The ICICI partnership program allowed MFIs to make microloans directly in the bank’s name, while retaining the servicing rights to those loans.
In the Krishna case, the branches of the MFIs that had participated in the program had been forcibly closed by local authorities, leaving no one to collect on the loans. In response, ICICI attempted to transfer servicing to the local Village Organizations that had been a part of the government-run Velugu microfinance program, but the results proved disappointing, with only negligible amounts collected. When the crisis abated, ICICI transferred servicing back to the original MFIs, where it was able to recover some portion of the loans. In fairness, using Velugu – whose collectors didn’t have much incentive to service ICICI’s loans – was probably not the bank’s first choice, but rather the result of bargains made with local authorities. Yet such is the way of microfinance – whether Krisnha in AP, Kolar in Karnataka, or No Pago in Nicaragua, one deals with the crises one has, not those one hopes to have.
The AAA that isn’t
If the servicing of microcredit assets either owned directly or via a microcredit-backed security is not transferrable, this raises serious questions about the nature of the underlying risk assumed by the investor. In the microfinance portfolio, some defaults, even in the low delinquency world of Indian NBFC MFIs, will happen. For this reason, most portfolio assignment and securitization transactions have some level of protection, whether by having the MFI cover the first several percent of losses, provide additional loans as collateral that can be swapped for non-performing loans, or even set-aside cash as a guarantee.
These risk mitigation techniques ensure that investors will not suffer losses in most cases of loan deterioration. And the rating of microcredit pools and securities is based largely on the analysis of repayment history and the level of risk coverage provided via these techniques. But what happens when the MFI itself collapses?
The fact is that following the collapse of an MFI, expected losses to investors holding its loans, even if they had been well-performing up until then, would still be very high, quite possibly 100%. And if that’s the case, how can the rating of such pools be any different than the rating of the MFI itself? After all, investors’ effective risk exposure is not to the portfolio, but to the MFI. One rating agency has already recognized this point: in its methodology of rating microfinance securitizations in Bolivia, Fitch explicitly states that any rating would be normally limited to between one and five notches above the rating of the MFI whose portfolio is being securitized.[iv] And Bolivia, following a crisis in the late 90s, has seen substantial expansion of credit bureau coverage of microfinance clients,[v] which can serve to maintain borrowers’ repayment incentive even following an MFI’s collapse. Though even that is just a theory – the situation has never been tested in a microfinance context.
And yet, we see that in India, where no microfinance credit bureau exists, CRISIL is issuing AAA ratings to microfinance securities where the MFI is rated as low as BBB- (one level above junk). Unfortunately, this would not be the first time that a rating agency assigns a AAA to assets it apparently doesn’t understand. For all the comparisons made between microfinance and subprime, this may be the one that actually fits.
True sale or mere tale?
If true sale is the precondition for asset-backed ratings, there are yet other glaring lapses that are conveniently ignored in Indian microfinance securitization. In most transactions, there is really speaking no segregation of the cashflows of securitized pools from the rest of the originator’s assets – the assets and cashflows freely commingle. In many cases, MFIs make payment of cashflows due to investors on fixed dates and in fixed amounts, regardless of the actual collection from the underlying receivables. Since transactions are quite often bilateral (courtesy of RBI Guidelines that discipline “securitization” and leave bilateral transfers completely without controls), there are even cases where the so-called investor takes post-dated checks of a definitive amount from the MFI, implying full recourse. The MFIs service the pools either with no servicing fee, or purely a token fee. The residual surplus, that is, the excess of rate of returns from the pool over the amount payable to investors, continues to flow back to the MFI without any underlying legal basis. In other words, if there was a list of 10 DON’Ts that defy a true sale, virtually all of them would be present in a typical MFI securitization in India. And yet, convenience overrides all rituals – the banks need MFI portfolios to satisfy their priority sector lending requirements, and the pressure on time in the month of March when they wake up to this need is too high to pay regard to rules of discipline.
Where does it lead to?
We strongly feel that the present form of securitization of microfinance in India needs substantial reform. It is necessary to rectify and discipline present practices in securitization, but even when that is accomplished, the strong tie between an MFI and its portfolio remains a serious conundrum for securitizations, which after all depend on breaking that very tie through true sale. Ultimately, this may prove impossible – microfinance may be too driven by the close, ongoing relationship between an MFI and its clients to successfully adapt securitization practices that were after all developed for very different assets. However, if a sustainable solution were to exist, it would have to resolve the obstacles that prevent investors from servicing their portfolios even after the collapse of the originating MFI.
Some approaches may hold promise, such as setting up an independent entity with fully-empowered receivership authority to take over a failing MF. This would allow the entity to continue operations until it can successfully sell the organization or transfer its non-delinquent customers to another MFI. Critically, such a takeover would have to happen quickly, while the borrower-MFI relationship is still warm, so a drawn-out legal process would be out of the question. Besides helping portfolio investors, such an entity could also benefit MFI creditors who have an equal interest in insuring that portfolios doesn’t melt away following MFI defaults. It’s a complex endeavor requiring significant regulatory support, but it could prove a useful tool for stabilizing the microfinance sector in times of crisis.
Other solutions may also be possible, but first, the problem needs to be recognized. Otherwise, the hidden risks may show themselves in a way that benefits no one.
References
[i] Beatriz Armendáriz and Jonathan Morduch, Economics of Microfinance. MIT Press 2005, p. 124
[ii] McCarter, Elissa. Mergers in Microfinance: Twelve Case Studies. CRS Microfinance, 2002, p. 94.
[iii] Daniel Rozas, Throwing in the Towel: Lessons from MFI Liquidations. Microfinance Gateway, 2009.
[iv] FitchRatings, Rating Methodology for Bolivian Microfinance Credits, 19 April 2007
[v] Remy N. Kormos, Credit Information Reporting in Bolivia, 8 December 2003
About the Authors
Vinod Kothari
Vinod Kothari
Mr. Vinod Kothari, based in Kolkata, India is internationally recognised as an author, trainer and expert on securitisation, asset-based finance, credit derivatives and derivatives accounting. He offers about 20 training courses every year on credit risk, securitisation and credit derivatives all over the World. For more information Visit Author`s website: http://www.vinodkothari.com .
Contact author via email: Click
Daniel Rozas
Daniel Rozas
Daniel Rozas is a microfinance consultant based in Brussels. Previously he worked at the US mortgage investment company, Fannie Mae.
Contact author via email: Click
Disclaimer
Views expressed in the article by authors are his own and do not necessarily represent those of Microfinance Focus. Reproduction in whole or in part without written permission is prohibited.
© 2010, Microfinance News. All rights reserved. 2008-09
22 Comments on “The Hidden Risks behind Microfinance Securitization”
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Perhaps the authors should also throw light on why securitisation is required for microfinance in India at all.
This is response to Shubha’s comment/question. The need for securitisation is common to all financial intermediaries, but when it comes to microfinance, the growing asset size (which is the very essence of microfinance economics as we explain in the article here) soon starts putting pressure on the balance sheet. Hence, unless off-balance sheet methods of funding, or any devices other than plain balance sheet borrowing, are resorted to, microfinance will not be able to sustain its growth rate. I would say, for MFIs, it is like be-or-not-be question
It is not clear as to what is the message that the authors wish to convey in this article. The main premise of the article is based on the somewhat hollow question of “what happens when the MFI itself collapses?” as though MFIs are collapsing everyday and everywhere around us. Why would an MFI collapse, especially in “the low delinquency world of Indian NBFC MFIs”, to borrow a phrase from this article itself? The Indian MFIs have been through at least two credit crises, one of which is also mentioned in this article. If these did not lead to MFIs collapsing in India, what could suddenly change? Could an NBFC MFI that is well-capitalised, having strong management systems that enable it to manage large portfolios of cash-loans (and not simply investments in derivatives) just simply collapse one fine day? Not likely. Secondly, the authors may also confuse readers by bringing in bilateral transactions under the broad umbrella of securitisation. Bilateral portfolio sale transactions, which are, at present significantly larger in number and size in the Indian microfinance industry, when compared to PTC-based securitisation transactions are typically unrated. Therefore, the authors’ argument questioning “AAA ratings” is meaningless. The checkpoints and structural risk-mitigation measures in PTC-based securitisation transactions make them much more robust than typical bilateral portfolio sale transactions, which is what makes them attractive to mainstream capital market investors. Such articles that try to sweep over several points at once, without much research should, therefore, not be encouraged.
To Bhagirath Iyer’s comment: the point is not whether MFIs collapse rarely or frequently. The fact is that they, like any institution, can fail. There are plenty of examples of strong and well-regarded companies collapsing very quickly — Enron, Lehman, Satyam… To suggest that this cannot happen to an MFI is, from a risk management standpoint, irresponsible, especially when a number of experts have been raising concerns that the market may be overinflated in some regions.
With respect to discussing both bilateral transactions and securitizations via special purpose vehicles, one should note that the risk of loss following an MFI failure affects both transactions equally, with most of the risk mitigation measures for SPV-based securities making relatively little difference, as we discuss in the article. Naturally, when discussing ratings, we’re referring to rated securities, and it’s difficult to see how that can be confused with transactions that carry no ratings.
Bhagirath Iyer possibly misses the point that in every securitisation transaction, the key assumption is bankruptcy remoteness – that is, we need to see if the transaction would survive in the event of bankruptcy of the MFI. So, whether MFIs collapse every now and then or not, we still have to answer that question. If the transaction is not immune from the bankruptcy risk of the originator, there is no way the transaction can be rated better than the rating of the originator. This is the key differentiator between the ratings of a plain debt and a structured finance transaction. If the rating of the transaction is based on the capitalisation and strength of the MFI, and not the assets, then it is not an asset-backed rating at all – in that case the rating agency is giving an opinion on the risk of failure of the MFI.
the points raised by the author and some of the comments by readers and replies by the author are age old. i remember attending a global finance conference in London way back in 1995 and one of the speakers were talking about large banks & NBFCs such as GMAC raising money through securitisation which is a win-win for all. one of the participants asked the speaker the question whether in the American markets (remember this is 1995), whether any securitised paper had defaulted. the speaker’s answer was that no originator actually allows his paper to default in the market since his ability to place future papers get impacted. when a paper begins to perform badly, the originator typically buys back the paper from the then holder and takes back the risk to himself. in India also, if one analyses the annual report of some of the banks such as ICICI for the years 2005 to 2007, that was the time when the personal loan portfolio was under serious stress. the papers securitised with the personal loans as underlying asset was performing badly and the banks concerned bought back the outstanding papers from the market which was reflected in their annual report also. hence when a paper originated by a bank or company is to be rated, the underlying stabiulity of the organisation is something that cannot be completley ignored. the rating normally represents the bankruptcy-remote situation but still if the originator were to really go out of business, the paper is likely to falter under normal circumstances except in two cases:
1. if the underlying asset is immovable such as housing, and there exists reasonable alternate ‘collectors’ who for a fee, can take over managing of the loans
2. if the investor has directly or indireclty the capability of managing loans and recovering money even though not backed by solid asset like housing.
even when assets such as car loans are securitised, if the originator ceases to exist, it would be extremely difficult for the holder of an instrument to be able to identify and trace back the clients and either collect money or repossess cars. since the underlying security documents, such as loan agreements, agreements which give right to seize the cars and RC Book copies are only with the originator and not the investor or even the trustee. hence if the orignator collapses, the investor would find it difficult to even get hands on the securityh documents without which enforcing the security is difficult.
in conclusion i woudl like to say that the risks of buying securitised papers is known to all and rating agencies are obviously expected to be also, i beleive, fully aware of all the risks inherent in rating such pools. the various colalterals, including cash collateral, additional security, conditions with respect to co-mingling of monies, separate bank accounts for depositing collections from securitised assets separate from bank accounts for other collections of the originator, rights to step into the shoes of the collection agent (which is the originator normally) incase of bankruptcy of the originator etc are all built in to protect such risks. the final rating, i assume takes into account all these risks and the mitigants to whatever extent that they can help. and investors too i assume would be fully aware of the risk to the cash flow in case of bankruptcy of originator and take a call on investment only based on their comofrt on these risk factors. hence while the points brought out by the authros are obviously valid and cannot be disputed, but these are very well known to all concerned and commerce is being run based on the risk-return ratio that each one of us are comfortable with, in our own lives
Ref Mr Vasudevan’s comment. That in several asset classes, the relationship of the servicer with the asset is so obtrusive that it is impossible to think of separating the two, has been discussed by rating agencies – see S&P report on non-commodified securitizations, dated June 20, 2005. This report as well as the issue of portability of the servicing function have been discussed at length in Vinod Kothari: Securitization, The Financial Instrument of the Future (p 725-728). In the peak days of securitization, the issue of servicer migration risk was highlighted by both S&P as also commentators. However, as the market started collapsing, people lost sight of the issue.
In case of car loans, the RCs of the vehicles contain endorsement in the name of the original lender – who, for logistical convenience, continues to remain as trustee for the sake of holding the hypothecation. Should the originator collapse, the hypothecation will get modified – there is absolutely no problem in exeercising rights of repossession by the successor servicer. Transfer of car loan portfolios quite commonly happens, even outside the world of securitisation.
The concluding remarks of Mr Vasudevan sound unconvincing – It says that we all know the risks of investing in securitised debt. But then, what is the relevance of the formal rating opinion? No one should get an impression that we are opposed to securitisation – some people may perhaps know that I have authored several books on the subject and I have been speaking and consulting on the subject for years. My co-author has also worked with the largest securitization agency in the world. However, the article highlights the weakness in the current system of securitisation of microfinance loans. If we understand the problem, we could possibly become aware of the need to evolve effective alternatives.
Most of the large deals of portfolio sale which happens in the sector are through unrated bilateral assignments. Agree with PN’s view that it is common knowledge that the buyer (usually the bank/s) cannot enforce his rights if the seller collapses. Therefore, the risk in a buy-out for the buyer is same as that of an exposure on the MFI. However, this is a convenient arrangement for all concerned such as lower rates and freeing tier 1 capital for the MFI, and faster run-offs and incremental PSL benefits for the buyers. If the MFI collapse, the buyer will probably lose everything and in that sense it is not bankruptcy remote. But it is a “true sale” as the buyer forfeits all recourse to the seller through appropriate documentation, but this is only optical due to obvious reasons. Therefore, the comment by Vinod that the formal rating opinion is irrelevant is correct and hence is not pursued typically by the buyers.
However, if securitisation is perceived as a major potential form of funding , where the buyers will not just be the banks but financial institutions and funds, which would essentially denote maturing of the sector and true integration with formal financial system, the issues raised by the authors will be critical. The current higher rating accorded to rated portfolios appear to be propped up through credit enhancements and structuring such as longer originator holding periods and shorter residual tenors. Such deals may not help the MFIs due to these very terms. Cannot but agree with the authors that there is a need to look for mitigating structures which would support proper securitisation transactions if such deals are to be attractive to investors, other than the banks.
I am surprised that Mr.Kothari, who is an acclaimed expert in the field of securitization is missing something so critical as mainstreaming of microfinance sector through genuine securitization transactions. It should not be forgotten that it was only a few years back that most of the current big MFIs were either Societies or Trusts with hardly any capital and were not regulated in the financial market. The sector has grown rapidly from the pre-dominantly social intermediation orientation to a full-fledged financial intermediation due to many factors like increased debt funding by banks, participation by PE players and most importantly due to the unmet credit needs of the clients. This rapid growth obviously causes concern and it is only beneficial if there is additional oversight from other players in the financial arena like the investors who include mutual funds and the rating agencies. It is necessary that microfinance sector demands the attention and contribution of all market participants and securitization is one small step forward. The sector will be better served if responsibility and restraint is exercised while commenting on a new industry practice.
It seems the main (easily rectifiable) cause of this potential issue is the misleading credit rating of an MFI’s securities by CRISIL – is it not simply practical to strengthen the credit rating mechanisms in India? Of course, other solutions can be merged into the system over time, but the best solution in the short term is to downgrade the stellar ratings given to these securities.
In response to Girish: the duality between rated securitizations and bilateral sales is an interesting one. Clearly, the “common understanding” explanation made by P.N. Vasudevan is a lot easier to make for bilateral sales than for rated securitizations. If a buyer and seller both have a full and equal understanding of the true risk, then who’s to say whether the transactions is appropriate or not?
In effect, the bilateral sale is a means of transferring capital-intensive assets from a capital poor entity (the MFI) to a capital rich one (the bank). This might be especially true for the smaller MFIs that have not been as successful at raising capital as the leading NBFCs. But the technical weaknesses raised in the article, especially the writing of post-dated MFI checks, suggest that still not all is well. Such a practice would in fact suggest that capital relief would not be appropriate, since the investor would continue to draw down payments until the MFI ran out of cash, putting other debt-holders at risk. So not everything in such a transaction stays between the two parties, and an appropriate level of oversight should still be required.
But the big question is whether the risk is truly well-understood by both parties, especially the bank. I’m not entirely sure that this is true in all cases. Perhaps it is, but if not, to the extent this debate helps inform market participants, it should bring better discipline to future transactions.
Like a coin, Securitisation of Assets have three dimensions.
The first dimension is the facilitation of funds and liquidity for the organisation.
The second dimension is the organisation almost becoming naked before the securitising agency-be it a bank or a funding organisation. The organisations’ Assets are no more confidential. The counter argument for this would be, “so would be the case when loans are being hypothecated”.
The third dimension is that securitisation is one way to pave for a bubble. Consider Organisation A securitising the assets to Organisation B and Organisation B re-securing it with Organisation C. At every level the asset value reduces but the costs would increase along with loading of costs and service charges.
This is something one should be watchful in the sector.
While working in the mainstream finance, I had the bad experience of seeing the effects of securitisation of assets-in that case, Cars and Trucks. The Securitising bank after securitising from us, approached all our customers offering them loans directly from the bank, resulting in substanctial client losses for us. This may not happen in MFIs yet, but one cannot be sure.
Best wishes
Hemantha Kumar Pamarthy (In Individual Capacity)
Ref Mr Diwakar’s comment – thanks for mentioning me as an expert on securitization, despite the last few words advising restraint and responsibility. I must say, we had both. Like I reiterated in my comments before, it is not securitisation that one is opposed to. In fact, I have emphasized that that is the only an MFI can sustain its growth. However, it does not have to be a US-style securitisation with a false sense of true sale and bankruptcy remoteness. We mention in our article too – that it is possible to envisage solutions to the problem: see the last para. However, before we can make any meaningful move to think of the solutions, the problem needs to be defined and understood.
Hemantha — interesting anecdote on using securitization to steal customers. But I think it highly unlikely for this to happen in microfinance, since the nature of the customer relationship is so different between MFIs and banks. If banks could steal MF customers this way, that would be proof that our argument has serious faults, since presumably stealing would involve in effect a migration of customers from one organization to another.
Microfinance securitisation has really taken off in the last one-and-a-half years. Prior to that, MFIs, like other financial institutions, sold assets on a bilateral basis to a banks, which were largely incentivized by regulatory benefits. Bilateral assignments still constitute a majority of off-balance sheet transactions. Such deals are opaque, largely unrated and mostly occur in the last quarter of the financial year.Such bilateral deals do not constitute ‘securitisation’. Securitisation is a market-driven transaction, priced against comparable rated benchmarks, tracked by independent agencies and transparent in nature. As such, to tar bilateral deals and market-linked securitisation transactions with the same brush is to do injustice to the tightly structured microfinance securitisation market that has recently developed.
Let us focus on the fundamental question that the authors have raised about microfinance securitisations in this context….
Read the full response ‘The Fundamental Premise of Securitisation: The Microfinance Case Study’ at http://ifmrblog.com/2010/07/09/the-fundamental-premise-of-securitisation-the-microfinance-case-study/
In my view the problem isn’t in the techniques but the approach to be followed.
We can’t talk about microfinance as a whole but to categorize the industry where there MFI profit and non profit oriented. Better we have MFI aiming at enterprise development, income generating activities and food security. In this understanding the management indicators and parameters to use are quite different, as I point out in my recent contribution:
Proposed guidelines for microfinance industry
http://www.microfinanceassociation.org/page.aspx?id=71&nId=90
Ascanio Graziosi
http://www.cambridgedata.com/GraziosiAscanio
1.Bankruptcy remoteness would be an issue even in securities issued by institutions which are considered reputable. Recent melt down is a excellent example where investors are struggling to get money out of very big names so why just blame MF.
2.The reason for above situation is multi fold in a failing organization employees would not cooperate , many employees would have departed , the process & system would be on verge of collapse etc. etc..
3.I feel servicer migration is very much possible in MF business if handled carefully, Sonata-Ajeevika is a very good example of this where one live MFI took over another without much strain. There are other examples also of portfolio transfer. In fact I feel that’s the new business opportunity for matured MFIs. Hence to maintain a sweeping statement that no servicer migration has ever been successful is a very wrong assumption/presumption to make . Though it may not sound so formal or sophisticated kind of transfer but the fact is loans have been moved successfully from originator to another servicer and more so the borrowers have continued under the new lender.
4.To understand more on Krishna district situation please read the Harvard case Who Killed Bhavani Manjula?–A Story of Microfinance in Andhra Pradesh (A) by V. Kasturi Rangan, Katharine Lee 14 pages. Publication date: Dec 05, 2007. Prod. #: 508021-PDF-ENG . It’s a wrong case to mention on BR. The truth is there wasn’t any need at all for servicer migration in Krishna scenario . Servicer migration only arises if the originator has failed there was no failure on part of originator the district administration choked the business. I wonder how can we term it as bankruptcy.
5.Kolar in Karnataka was a community based issue where is the question of servicer migration there
6.No VK Sir, I am not trying to say that MFIs wouldn’t collapse as Mr. Vasu said business is a game of Risk & rewards and as the portfolio grows bigger everyone knows there would be some failures. Since you are an expert in this field I would like to ask you to suggest innovative system wherein such situations are dealt with.
7.One I can think is in transactions being undertaken by IFMR wherein 2-3 MFIs are involved in a single note issue is it possible that MFIs work as a consortium in case of a bankruptcy of one of the originators. There can be an underlying agreement at the beginning to that effect.
8.CRISIL is issuing AAA ratings to microfinance securities where the MFI is rated as low as BBB- (one level above junk). Unfortunately, this would not be the first time that a rating agency assigns a AAA to assets it apparently doesn’t understand . CRISIL does grading of MFIs and it rates their pools both are two different things. The science involved in both process is very different. I have so far not come across any MFI which is graded below mFr3 and its pool(s) is rated AAA. We would be keen to know if any such transaction.