Expert View: Securitization in Microfinance

Microfinance Focus, Aug 30, 2010: Vinod Kothari, based in Calcutta, India is internationally recognised as an author, trainer and expert on securitisation, asset-based finance, credit derivatives and derivatives accounting. He is an accomplished trainer on securitization and offers about 20 training courses every year on credit risk, securitisation and credit derivatives all over the World.

In an interview with Microfinance Focus, Mr. Kothari spoke about the regulatory attention and intervention that microfinance securitization in India requires. Edited excerpts:

Microfinance Focus: Despite the risks of securitisation for microfinance institutions, it remains a popular route for MFIs to raise funds. What are the reasons behind this?

Vinod Kothari: The reasons are quite obvious. The way microfinance in India is it is expanding at a fast pace, both by lending more to the existing borrowers as also by expanding the customer base. This fast pace cannot be sustained without increasing liability base. Banks have limitations. Hence, MFIs have to explore non-traditional methods of financing. Securitisation is the obvious choice.

Securitization in India is mostly nothing but a loan limit – the so-called bilateral transactions have no discipline of securitisation transactions. Even those that promise to be securitisations have not gone into the basic question of originator failure.

Microfinance Focus: Do you think microfinance institutions fail to understand the hidden risks of securitization and there is a need to educate them through trainings, workshops etc?

Vinod Kothari: They are realizing the need to understand securitization better. In the past couple of years or so, we are getting increasing number of participants who are microfinance practitioners or are concerned with microfinance securitisation. They have enjoyed the trainings provided by us and felt that several of the ideas propounded in our training workshop would be interesting to apply. Well, the real impulse to apply any creative method does not come until there is regulatory need.

Microfinance Focus: What are some of your efforts in this direction?

Vinod Kothari: Securitisation School is our regular feature and we will be organizing the 13^th School from 6-11^th of September in Kolkata this year. Besides covering general securitisation methodology, we surely cover microfinance securitisation at length. We are not including a full-scale cashflow model of a revolving securitisation transaction as a part of our cashflow modelling. Revolving method has not been used in India as yet and is aptly suited to microfinance securitisation.

Microfinance Focus: What role can microfinance regulators play in mitigating some of the risks of securitization? Have they taken any such measures so far?

Vinod Kothari: Regulatory attention to liquidation of microfinance entities is needed. Of course, this has to be a part of a comprehensive regulatory design for microfinance entities. The regulators in India have envisaged microfinance regulation for quite some time. Microfinance has become a massive phenomenon. So, if at all it is realised that regulatory intervention is required, it would be   a day too late if it is not now.

Microfinance Focus: Do you feel RBI might make amendments in its proposed guidelines for securitization considering the fact that it will have a negative impact on MFIs?

Vinod Kothari: I am personally almost sure that the draft of the Guidelines that came in May would not be applied to microfinance entities as it is. If it is applied as is, microfinance entities cannot securitize at all.

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