Understanding and channelizing local issues at the grassroots level to policy makers at both regional and national level is both challenging and vital. With a dual objective to create a platform for conducting such local public-private dialogue (PPD) to enhance awareness of issues and assisting in measuring and representing local conditions to inform state and national policy, Centre for Development Finance (CDF) initiated the ‘India Local Economic Environment Project’.
Forming the basis to this project is the PPD process, which is a crucial initial ingredient, involving identification of various stakeholders cutting across diverse functions and their analysis. Somasundaram of CDF explained “We met an array of stakeholders ranging from elected representatives of panchayats, farmers, entrepreneurs who manufacture and sell bronze idol and lamps, vendors in vegetable and fish market, industry practitioners, bankers, NGOs, Government officials etc. Also we got hold of the District Collector and got the list of line department officials who would be of use to this initiative.”
Further to this on 1st July 2010, a one-day workshop was held in Thanjavur, one of the operational areas of the project, where a PPD was conducted. The participants were the horticulture and agriculture officials from Thanjavur district administration, academicians, union chairman of Thanjavur, secretary of chamber of commerce and representatives of – farmers’ association, bronze idol association, flute making and mud-idol association, and Bus owners association.
The participants were divided into groups and were asked to frame a vision statement for Thanjavur in the year 2015 – they identified “Self-sustained Thanjavur” as their vision. Having dealt with the ideal vision, the participants ventured towards identifying obstacles in reaching towards the said vision, some of which were: Non-availability of water inflow for paddy cultivation and non-availability of storage godowns for paddy; Poompuhar not procuring the bronze idols from the manufacturers; Government’s non promotion of agro-based industries; Lack of encouragement in developing temple-based tourism and non-availability of policy for rotation of crops. The existing procedural delay in setting up of business was also pointed out.
The participants realized the need for innovations in agriculture related activities. Also the information shared by the Tamilnadu Agriculture University on the manufacturing of small weeder and selling the same at reasonable cost for the farmers (which is been imported now at higher rate) was quite useful to them.
At the end of the day the participants formed a working group, comprising a healthy mix of private and government representatives, with consent to meet once a month (first meeting on 26th July 2010) for setting up priorities to be carried out to achieve the identified vision.
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Somasundaram, Progam Head – Development Metrics and Lalitha N, Project Manager, of CDF contributed this post.
As planned, DNE started the training of village women in Dairy Healthcare and Productivity Management in Thanjavur. This series of training was held between 25th – 27th June. The trainees were identified from different villages across Thanjavur Taluka. These women were identified according to their leadership qualities, literacy level (minimum 8th or 10th standard), and level of influence on other village women. DNE expects that by training such opinion leaders through this programme DNE will be able to achieve its goal of making dairying remunerative for the farmers.
Village Animal Health Workers (VAHW) being trained on cattle management
During the 3 days training programme, the women were given all the vital inputs regarding dairy management. Different issues like current dairy scenario, marketing strategies, feeding and housing of cattle, animal body and monitoring & evaluation of cattle were discussed at length.
This time the training gathered learnings from the experiences of the previous year. The duration of the training period was shortened and the focus was more on a fewer identified critical points. More audio visual aids were used to deliver the training in effective way. The training programme was designed to be an interactive one. Though it started in a low note, very soon it was found that the women got involved and started interacting actively with the trainer and fellow trainees. Many interesting questions were raised during the training programme, which were aptly answered by trainer and sometimes by the fellow trainees themselves. The trainees showed great enthusiasm and after the second day training, one of the trainees calculated the Return on Expenditure for her dairy business as demonstrated during the training programme on her own. Interestingly, she included her own labor costs in that calculation!
Below is her calculation of income from a cow:
Calculation of Return on Expenditure by one of the trainees
Translation:
1 day = 14 L
30 days = 420 L * 14 Rs
Feed = 1 day 120
30 days = 120 * 30 = 3600
Labour 1 person 40 * 30 = 1200
420 * 14
Income =5880
Expenditure=4800
Profit =1080
Even though these women were from different areas and hailing from different socio-economic strata, this training provided a platform for these women to interact with each other and share their experiences among themselves which paved way to strong bonding. One of the trainees, who have been cultivating Azolla brought some samples and shared with others so that they can also start cultivating and feed their animals. We learnt that she had started selling the azolla to other women at Rs.10 already and had started earning not only by saving costs on feed but also by selling azolla. One trainee runs milk collection centre in her village and is already and entrepreneur. She shared her insights in the marketing of milk with the rest of the trainees.
Dr Rajeshwaran, the trainer says “Responses of these women were very enthusiastic and they were keen to learn alternate sources of income generation. Such kind of training helps in creating a paradigm shift in there thinking. We encouraged them to have income in relevance of their expenditures. Thus such trainings will build a spirit of entrepreneurship in rural women.”
DNE will have such training sessions every month and motivate the rural women to start their own business by providing them all the necessary knowledge about cattle management. DNE will also support them by providing the inputs that they require to sell. These women will in turn go to their villages and share information with other rural women about cattle management and provide them necessary aid for cattle. These trained women will advice others on how to manage their cattle so that they can get maximum profit from available resources.
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Madhur Khunger and Dr.Gangadharan of Dairy Network Enterprise contributed to this post.
In its endeavor to enhance investor awareness of micro finance, IFMR capital organized the second in its series of seminars titled “Microfinance: An emerging asset class” at the Grand Hyatt, Mumbai on June 3rd.
Aimed at providing an in-depth analysis of the micro finance sector, the seminar in addition to covering the various challenges, risks and evolution of the industry, also provided a platform for industry practitioners and investors to connect.
Several leading capital market investors including mutual funds, pension funds, bank treasuries and private wealth management companies converged at the seminar making it lively and a thought provoking exercise.
P.N Vasudevan from Equitas Micro Finance gave a brief description of the sector so that those new to micro finance could understand the model. His talk was followed by Kunal Agrawal from Crisil’s structured finance rating team who detailed on the intricacies of rating microloan-backed securities. Later Sucharita Mukherjee, CEO, IFMR Capital, spoke about the value add provided by IFMR Capital in structuring the transactions and building market infrastructure. Also, Chaitanya Pande, Head – Fixed Income from ICICI Prudential AMC, one of the first Indian mutual funds to invest in microloan backed securitization, spoke about their investing experience and expectations from the sector.
With a greater number of investors showing interest in the asset class and armed with their continuous feedback, IFMR Capital will be working to expand its product suite and meet investor expectations better. Ensuring cheaper and reliable sources of funding for our MFI partners will, of course, still be the cornerstone of everything we do.
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Kirthi Rao, IFMR Capital, contributed to this post.
As part of its community connect program, Dhanei KGFS had organized a drawing competition for children to let their imagination and creativity loose through colors. It was month of May, peak of summer season where temperature soars, but that was hardly a deterrent to the exuberance of children who braved the heat and reached the venue well before scheduled time. Keeping this in mind Dhanei KGFS conducted the event early morning so that kids can be home before the scorching heat takes over.
Registration process for the competition started at 07:00 AM at the venue of Badakushastali High School with overall 173 children registering for the competition; they were then divided into three categories according to their age and the class in which they were studying.
Student participants
The competition started at 8:00 AM sharp and the theme was “My Village”, allowing students complete liberty to wander through their world of imaginations and draw the best they can. The drawings were collected one hour later and it was a visual treat to look at the panorama of colors on display and the vivid thoughts that children depicted in their drawings.
A drawing master from the school helped to judge the drawings and the results were announced at half past nine. There were three winners from each category and ten consolation prizes were also awarded to children from each category as a token of their participation and their skill. The community connect program was finally concluded at half past ten with the prize distribution ceremony.
Some of the winning entries
Overall it was a heartening experience to engage the community that we are serving through such a program and see the little artists display remarkable creativity.
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Itimayee Pala of Dhanei KGFS contributed to this post.
IFMR Finance Foundation (IFF), which recently came out with a plan for commercial banks to deepen financial access using the Business Correspondent (BC) model , is now working on an action plan to roll out the model extensively across India. The action plan proposes to set up a large number of conveniently located village level touch points across the country to provide a full-range of services including savings, credit, insurance and payments that is viable for the BCs, the bank and the customers. The significance of the initiative can be gauged by the fact that of the 600,000 habitations in India, hardly 30,000 have a bank branch.
IFF is proposing two models – the minimum service model (savings, payments and insurance) and the full service model, which includes lending.
IFF, which is designing the models, including working out the business plan for the various models, is to be involved in identifying the BCs; selecting the training and technology partners; working out business plans for the various models that are being proposed; designing the channels, processes and products; and zeroing-in on appropriate geographies for implementation.
Key to the success of this massive BC programme that IFF is proposing for commercial banks is establishing healthy partnerships with institutions that have built strong track records in working with village based entities. CARE India, a Delhi-based humanitarian organization, is one such institution that connects with a multitude of village level NGOs and provides them with tools and facilities to effectively serve the rural population. The support provided by CARE, after a careful due-diligence, ranges from product design, training, and funding to advocating for policy changes in relevant areas of their work. Thus CARE’s partner NGOs could become potential BCs of the bank.
To explore the possibility of CARE’s partner NGOs becoming BCs, a workshop was conducted at IFMR’s Office at IIT Research Park on 18th May 2010. While the workshop was attended by 25 NGOs who work in as diverse fields as livelihoods, health and education, more than half of them were also into microfinance.
Suyash Rai of IFF set the stage of the workshop by providing an overview of the proposed BC model of financial deepening. The discussions that followed were extensive. While CARE’s Chennai head Devaprakash suggested that his organization could be involved in providing training tools and infrastructure, apart from actually being involved in training, the NGO partners flooded Suyash with questions ranging from implementation to impact. It was very obvious that the partners were keen to become BCs and wanted to clear doubts and concerns.
Suyash Rai presenting the BC model.
Interaction with NGOs after the presentation.
The questions and apprehensions flagged by the NGOs are significant inputs for IFF to formulate an effective, viable and successful BC model on the ground. Some of their concerns that included, “how will the BCs of one bank function alongside BCs of other banks in the same area?”; “will there be credit ceilings?”; and “how will the time spent by the BCs on rejected loan clients be accounted for?” provided insights into some of the operational issues that would be appropriately addressed for the proposed initiative to be taken to scale across the country. If you have ideas on improving the BC model, do share it with us in the comments below.
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Asha Krishnakumar, Farzana Najeed and Kirthi Rao contributed to this post.
What would it take to foster a measurable increase in the availability of agriculture finance to small and medium farmers? Panayotis N. Varangis from the International Finance Corporation explored some answers to this question when he spoke at IFMR on “Innovations in Agriculture Finance and Weather Index Insurance”. We bring you some of the thoughts he shared on making agriculture finance more accessible to small and medium farmers.
Agriculture finance, especially to small and medium farmers, is riddled with risks and challenges. Some of the broad categories of risk include -
- Climate change risk – exposure to variations in weather patterns
- Production/yield risks due to natural hazards
- Market and price risk
- Collateral limitation in the form of weaker and riskier security
- Government interventions weakening local rural credit culture
Many programs take the safe way out and end up lending to large farmers. A more robust way to lend to small and medium farmers is to explore existing delivery channels that focus on small and medium farmers and promote products that mitigate these risks. This is an appropriate time for the lending institutions to take a step back and re- visit the lending strategy.
Choosing the right lending approach
While it is not necessary to abandon the traditional method of lending, it makes good sense to adopt an integrated approach of judiciously combining the old and the new methods of lending.
It is also important to learn from the existing projects to identify success factors, replicate and scale up. Many a time all it takes is designing a sub-component in an existing project than having to start something totally new. Existing channels that connect the small farmers should be identified to build financial capabilities. Lending institutions can leverage these existing linkages in the agriculture supply chain by connecting with participants such as input suppliers, commodity procurement agencies, and farmer groups.
Agri-lending is a challenging task and identifying risks and devising mitigants requires a lot of work with ears close to the ground. There has to be collaborative participation in the system and existing linkages have to be leveraged to the fullest possible extent. A comprehensive solution can be worked out only by bringing together different stakeholders and participants.
How to expand and reach scale?
- Map opportunities – Identify opportunities in the commodity supply chain/breadbaskets and design projects around them.
- Implement projects – Identify key components of success from existing projects, scale up and replicate, map further opportunities for the sector/region
- Capacity building and knowledge sharing – Integrate small farmers into the financial system, including working with producer organizations and leverage farmer capacity building in productivity & standards (e.g. finance investments for new technologies)
- Leverage and replicate – Complement existing initiatives, apply lessons learned/best practices from projects and consider providing incentives (e.g. financing and/or risk sharing at initial stages to demonstrate sustainable new financing approaches/products)
Some important levers for Financial Institutions to increase agriculture lending are
- Loan product design
- Tools to identify and manage risks
- Delivery channels to reach small farmers
- Financial literacy – awareness and training
A recently held regional forum on agriculture finance in Zambia had participants from local banks, producer organizations, input suppliers, NGOs, international organizations, donors, and consulting firms. The participants were asked to point out one change each that, according to them, would bring about effective agri-lending. The 5 winning ideas that emerged were –
- Develop a system of private sector mechanized service providers in rural areas: lead farmer/entrepreneur leases equipment to provide services to surrounding small farmers
- Invest in irrigation systems—community-based , owned and managed
- Develop a franchise model of community based storage facilities, provide real time market information, potential input demand aggregation
- Create private sector led agri-lending training centers for bank staff and farmers
- System of profiling of producer groups on their governance, financial management and performance—profiles that can be used by banks for lending to them
Like these ideas or have an idea to take agriculture finance to small farmers? Voice your thoughts, we want to hear it.
On May 7th 2010, the University of Chicago and Northwestern University hosted the sixth annual Chicago Microfinance Conference. I represented IFMR Capital at the event to discuss the evolution of microfinance as an asset class in the Indian context. Below are some of the highlights from the many panels and speakers, but here is the 30 second summary of what I found most interesting:
- A greater amount of intellectual honesty around the discussion of microfinance’s impact on poverty. Nearly everyone now agrees control groups are necessary to study the impacts of micro-credit properly. Consumption smoothing is recognized as important.
- Interest rates are coming down and will continue to fall at a faster pace.
- There’s a danger of short-term money in some microfinance equity markets. Longer term investors are needed, but the pension fund/large institutional funding channel needs better vehicles to invest in.
- Microfinance bubbles in Morocco, Pakistan, and Bosnia could have been prevented with more discerning investment (on the part of multilaterals mainly) and credit bureaus.
- Reaching more remote populations is the next frontier. BRI is one of the few success stories.
- M-Pesa (the mobile payment platform) now has over 9 million clients in Kenya. Wow.
Impact Debate
The “impact of microfinance debate” has been a popular one over the past year, especially after the publication of the first few randomized evaluations in microfinance (e.g. CMF and MIT’s Spandana study) have shed light on how limited our knowledge of microcredit’s impact really is. During a panel entitled, “Impact Monitoring and Reporting,” the panelists (each from high-profile microfinance funders and networks) admitted that we do not know whether microfinance alleviates poverty. Even though some of the panelists’ websites and marketing materials do not yet reflect this admission, it is refreshing to hear in public a greater agreement upon the limitations of most previous impact evaluations, primarily due to the lack of control groups in past evaluations. Speakers also noted that even if it does not lift people out of poverty, microfinance’s ability to help smooth consumption is a praiseworthy accomplishment – an insight that many credit to Morduch, et al’s Portfolios of the Poor.
David Roodman from the Center for Global Development hosted a session discussing his Open Book Blog, in which he “shares the writing of a book about the history and impact of microfinance.” Some of the main points Roodman made in his presentation can be seen in this post he made last month. (I think the “OK Go” video really drives home his point on selection bias!)
Investment and Interest rates
Panel discussion; Peter, second from right at the panel.
On the “Microfinance and Wall St” panel, we discussed the evolution of MFI funding in recent years (e.g. more commercially driven, a bifurcation between top-tier and smaller MFIs) and how IFMR Capital is having early success working with small and medium sized MFIs to access domestic debt markets. Some panelists characterized the current global funding environment as, “too much money going after too few opportunities,” but I only see this as true if one limits the focus to the world’s 50 largest MFIs. In reality there are many underfunded but strong MFIs.
What is needed are: 1) More technical assistance providers to work with high-potential small MFIs, and 2) More conduits such as IFMR Capital to create structures linking smaller high-quality MFIs with the investment appetite of larger investors, who cannot individually go after relatively small-ticket deals.
Carlos Castello from ACCION International, and a Board Member of Banco Compartamos, was on the panel so there was a question from the audience on whether interest rates charged to customers are too high and MFIs too profitable. Mr. Castello pointed out that Compartamos has lowered their rates by about 10% the past year and reiterated their belief that high-returns will invite more competition, and that competition will be the driver for lower rates. I am still seeking to better understand why the flood of new MFI competition that markets such as India have seen is not occurring in Mexico, where Compartamos and others have proven microfinance can be a very profitable business (Compartamos’ ROE is approximately 40%).
I was pleased to highlight Bandhan’s recent interest rate slashing and drew a comparison to the Indian telecom sector as a more mature market that microfinance can continue to look to for a number of comparisons. As the Indian mobile market has shown, it is certainly exciting to see the pro-customer innovations that come once businesses realize their market will be require a low-margin, high-volume business model. This of course requires a different kind of equity investor – one with a long-term horizon vs. short-term – and will likely rattle some of the current private equity money investing in the Indian market.
Interview with IFC’s Microfinance Chief Investment Officer
The last session of the day was an interview with Martin Holtmann, who helps oversee IFC’s $1.4 billion portfolio of microfinance investments. Given how unique each country’s microfinance market is around the world, it was fascinating to hear the perspective of someone with investments in dozens of countries. When asked point blank whether multilateral organizations were responsible for the recent microfinance bubbles seen in countries like Pakistan, Bosnia, and Morocco (Nicaragua is a crisis but of a different kind), Mr. Holtmann provided an interesting response.
Given their mandate to work directly with private companies, he said the IFC had been as careful as possible to make investments where institutions had the capacity to absorb liquidity and grow, but funding from organizations like the World Bank (IFC’s parent) made subsidized loans directly to governments, such as a $100 million soft loan to Bosnia’s government, which then disbursed the funds as the government saw fit. In some cases this led to overheating the sector and damaging the market for all participants.
Turning to India, Mr. Holtmann expressed concern about the amount and kind of money chasing MFI equity ownership, and drew comparisons to the U.S. residential real estate market a few years ago, where investors looked for opportunities to “flip” investments within only a 12-24 months of investing.
I am not aware of many exits made in the Indian private equity market within two or three years of investing, with the exception of a few transactions such as Sequoia’s purchase of Kalpathi Suresh’s stake in Equitas in mid-2009. My sense is most of the PE money looking at MFIs today realize exits are at least 4+ years post-investment, but if quick exits are in fact expected by investors, then the aforementioned interest rate cut by Bandhan will hopefully spook some of this money out of the sector and allow long-term oriented investors better valuations at which to enter.
Here are my takeaways from the rest of Mr. Holtmann’s interview:
On Credit Bureaus: They make little sense in a pure group-lending environment, but in urban or individual/SME lending markets, they are crucial. In fact he thinks credit bureaus could have prevented much of the problems in Bosnia, Pakistan, and Morocco.
On Repayment Crises: In a stress situation, repayments only fall off a cliff if the growth of an MFI has been undisciplined. Contrary to prevalent opinions, if group lending is done properly then it is reasonable to believe delinquencies at an MFI could hit 10-15% and still recover. An MFI like FINCA Uganda would be almost impossible to destroy even if delinquencies were over 10% because of the overall strong culture.
What WON’T we be talking about in five years? Interest rates. They have come down globally by 150-200 bps the past two years (according to CGAP) and will continue to fall.
What WILL we be talking about in five years? We will still be talking about the difficult to reach populations/sectors (e.g. in Bosnia only 4% of MFI portfolio is in agriculture). Bank Rakyat Indonesia (BRI) is able to setup branches to serve areas with a population as small as 4,000 but for most MFIs the average population has to be much higher number in order to be profitable. Going to more remote, dispersed populations will be the next frontier.
If Mr. Holtmann is right, then kudos to KGFS and IFMR Rural Finance for taking on the next frontier (on many fronts) today.
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Peter Bremberg of IFMR Capital contributed to this post.
Just as Darwin discovered the law of evolution in organic nature and just as Marx discovered the law of evolution in human society, Sankalp 2010 discovered the law of evolution in social enterprises. Hosted by Intellecap in Mumbai on May 4-5, Sankalp displayed many Hybrid Value Chain (HVC) and Public Private Partnership (PPP) models that are systemically transforming the relationship between business and social / citizen sectors on the basis of mutual social and economic value creation.
In sum, Sankalp 2010 celebrated the successes of a rare tribe called social entrepreneurs, who are passionate about seeking ways to create value in the economic (jobs, income, etc.), social (health services, education, social inclusion and self-esteem), and cultural (reading, expression of creativity) spheres. As was profiled at Sankalp 2010, the work of this tribe, which addresses such basic human needs as water, housing, and health, also illustrate how various dimensions of value creation are interwoven and are necessary to enable broad-scale development and growth in underserved communities.
Much of the growth and innovation found in free market societies is credited to entrepreneurial activities and disposable income. Entrepreneurship, however, is sensitive to context and to the existence of economic reward systems, a point that was captured in the keynote address delivered by Mumbai Tiffin Box Suppliers Association (famously called “dabbawallas” that means “lunch-box guys” when translated in English), which is a Mumbai based six-sigma certified organization that delivers hundreds of thousands of lunch boxes to offices every day. In typical Drucker-speak, the dabbawalla highlighted the fact that their organization has for the last 120 years made “selling unnecessary” and rather “identified a need and filled it.” The result: error-rates of 1 in 16 million transactions; 400,000 transactions per day; 200,000 lunchboxes delivered to their clients by a 5000 member strong workforce (85% of who are illiterate) every single day, and without fail!
One necessary condition for growth is that innovation and entrepreneurial activities result in products and services that create value above input costs. Because many input costs – such as provision of infrastructure or legal institutions – are picked up by society in developed markets, the entrepreneur is able to capture a larger part of the value created. However, where markets are too inefficient to cater to specific social needs, the invisible hand of the government is expected to provide necessary services, as is the case with healthcare systems, education, etc.
In many underserved communities, however, neither the invisible hand of the government nor markets cater to even the most basic needs of their members, resulting in structural and behavioral barriers to the community’s growth and development. These barriers are addressed by products and services engineered by social entrepreneurs. While debating the role of the government in advancing this sector, the panelists at Sankalp 2010 were divided in their opinion: one side believed that government’s involvement was a “kiss of death” for this sector, while another side championed the idea of government acting as venture capitalist. In sum, panelists concluded that the role of government is to create an enabling legal, regulatory, and policy environments, which include the removal of market distortions stemming from preferential government policies or excessive regulations.
Plenary session
The last plenary panel of the first day of Sankalp discussed the financial infrastructure required to accelerate social enterprises, and it summed up the most recurring thought that persisted through the two day event: To increase market penetration for social enterprises, business models and technologies that have the potential for success in low-income markets need to replicate and scale-up, incorporating continuous innovation in technology development and deployment. However, one of the critical elements that ensure replication and scaling of social enterprises is their access to consumer and institutional financing, including some government investments in capacity building.
Because the social venture idea is relatively new and at proof of concept stage, panelists concluded that patient capital and funding flexibility is required, including innovations such as gap financing, bridge loans, receivables financing and quasi equity.
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Tilak Mishra of IFMR Ventures contributed to this post. The post earlier appeared in the NextBillion blog.
Having covered the fundamentals of debt finance and the basics of securitisation and securitisation structures as well as the roles of the different parties to the transaction on the first day, Day 2 of the workshop on ‘New Sources of Financing for Microfinance Institutions’ began with a session by Kunal Agrawal, Head of the Structured Finance team at CRISIL.
Kunal described Crisil’s evaluation framework for analyzing the risks that arise in securitisation transactions and the methodology adopted by Crisil to rate the securities issued in MFI securitisation transactions. The importance of knowing their clients well and capturing material business information in formats for better analysis was rightly emphasized in this session.
Once it had been seen as to how the securities were created from the MFI’s microloan pool, how the structuring was done and rating assigned to it, the question now was how it would create value for the MFI. Meenal Madhukar, Head of Investor Relations at IFMR Capital, now, took the stage and described what the investors wanted and how MFIs were benefiting from reaching out to a larger set of investors through securitisation transactions. She again stressed on the necessity of having timely and transparent information generating systems, this time from the perspective of investors assessing microloan backed securities. She also conveyed how IFMR Capital’s underwriting, market building through underwriting and building infrastructure (such as the pricing and structuring framework) plus new initiatives like the Deal Portal was helping to establish microfinance as a mainstream asset class.
Abhijeet Roy from Crisil then took the participants through the rating rationale of a live microfinance securitisation – an exercise that helped them put their learning to use and see applications of the concepts discussed till then. With their queries about how to optimize the structure and how different operational realities would reflect upon the rating, the MFI participants made it a valuable session for everyone including the trainers who got a deeper insight into the needs of MFIs and what still needed to be done (for instance, a query was raised about whether investment into the PTCs should be treated as financial income or investment income).
Kartikeya Singh, IFMR Capital’s chief legal counsel, took the last and much awaited session on legal and regulatory issues related to fundraising. After discussing the legal and regulatory parameters within which securitisation transactions take place, Kartikeya also took the participants through regulatory requirements pertaining to other sources of debt finance such as NCDs.
The day ended with a short recap of the two days of the workshop and the MFIs receiving certificates from Crisil acknowledging the participants’ contribution to making this knowledge sharing exercise a great success. We thank all the MFIs that participated and hope that this will be the cornerstone of their growth through sustainable and efficient access to debt capital markets, the benefits of which they would pass on to their clients who hold the key to inclusive growth in India.
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Kirthi Rao, IFMR Capital, contributed to this post.
29th April marked an extremely informative and stimulating start to this year’s MFI workshop on ‘New Sources of Financing for Microfinance Institutions’.
Representatives from a dozen MFIs gathered to understand the basics as well as deeper concepts related to raising debt funds and the new and upcoming options available to MFIs. Rather than just discussing products for debt funding, the sessions aimed at equipping participants with the tools to assess different debt funding options and choose the best for managing their requirements in the most cost-effective manner, while also diversifying their sources of funding.
The day started with a brief description of IFMR Capital and its work and how it connects institutions impacting low-income households with debt capital markets. This introductory segment was followed by Vineet Sukumar’s presentation of basics of debt finance. This session started with fundamentals such as the discounting concept and went on to compare different debt funding options comprehensively by looking at sample term sheets that clearly laid out the differences in parameters such as rating requirements, tenure, asset-liability management implications, pricing etc.
Kunal Agrawal, head of the Structured Finance team at CRISIL then took on from where Vineet had left and gave participants a very in-depth view of what constitutes securitisation and the experience in Indian and international markets. The session evoked a lot of discussion about the relative merits and benefits of SPV based securitisation transactions, putting the expert trainers to good use and certainly creating insights for everyone to take back.
The next session, again taken by Kunal, started with emphasizing that securitisation isn’t complex as it sounds and gave a piece-by-piece description of the SPV based securitisation structure (that has been followed in the microfinance securitisations till date) bringing out the role of each party – be it the originator, the servicer, the trustee, the rating agency, or the investor. The questions from the participants showed their eagerness to understand these transaction structures better, especially their role within it.
This stimulating round of questions almost logically lead to the next and last session which was a description of the securitisation structures that can be utilised- par or premium and the different types of subordination, the effects of the structure chosen on credit enhancement and protection for investors was also explained through working examples.
At the end of the day, all the participants expressed that they were eagerly looking forward to tomorrow’s sessions on the actual methodology followed in rating microloan securitisations, market feedback for these securities and the legal and regulatory issues involved. IFMR Capital also looks forward to another day of gainful knowledge sharing and discussion and takes this opportunity to thank partners ACCESS and CRISIL for their time and support.
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Kirti Rao, IFMR Capital, contributed to this post.
