Over the years, the demand for funds in the microfinance industry has outpaced the growth in investment by banks. In addition, banks are not the ideal place for these assets, given the nature of cashflows and maturity of micro loans. Hence, even though MFI assets are part of priority sector lending, the excessive focus on bank capital has effectively raised the cost of capital for MFIs. The upstream funding for microfinance needs to be diversified to harness a diverse array of borrowers, so as to avoid the constraints and unique compulsions of any one source. However, at present in India, MFIs are not permitted to mobilise deposits, or borrow from international lenders, or from MIVs (Microfinance Investment Vehicles).
The ideal financing channel for them, in this environment, is securitization. Through securitization, a pool of loans across many borrowers (and ideally across many MFIs) would be turned into a tradeable securities that are targets of investment by a diverse array of investors, with different beliefs and compulsions.
In response to a (to be expected) comment on the "dangers of securitization" on the same forum, Mor replies:
There is no question that any such effort needs to be handled with a great deal of care and attention. We also however need to remember that while there are clearly lessons for us in India from the financial markets crisis in USA our markets are at a very different stage of development and our experiences with securitisations have thus far been quite positive.
We also need to be careful about what are the implicit alternatives we have in mind if we are concerned with these developments -- limited financial access, deposit taking by under-capitalised financial institutions to finance their assets, large institutions seeking to do direct origination using credit scoring without ever meeting the customer, much wider coverage of deposit insurance amounting to transfer of all risks to the tax-payer.
Related: See a detailed note by IFMR Capital on this topic here
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at email@example.com