IUP Journal of Bank Management | Journals

The IUP Journal of Bank Management

Microcredit-Backed Securitization (MBS): A Win-Win Scenario for MFIs and Investors

Article Details

Pub. Date	: May, 2021
Product Name	: The IUP Journal of Bank Management
Product Type	: Article
Product Code	: IJBM20521
Author Name	:C Anitha, S Galab and Raghunatha Reddy
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 12

Price

Download

Abstract

Securitization is an off-balance sheet tool that facilitates capital relief. However, in India, securitization originated three decades ago, yet, the market is still in its development stage. In this backdrop, this paper examines an innovative existing structured finance model-securitization as an emerging alternative for sourcing funds to tide over the liquidity and funding constraints in MFI sector. Currently, MFIs rely on lumpy cash flows from banks during Q3 or Q4, when banks are trying to fulfil their CAR needs. However, the structured instruments facilitate MFIs to access the capital markets to match their funding and liquidity requirements. The paper outlines the concept of structured finance and emergence of new asset classes, application of structured instruments in the area of microfinance, securitization models-Direct Assignment (DA) and Pass Through Certificate (PTC)-in MFI sector with insights from industry experts. It also examines the advantages to both originators and investors and suggests the prerequisites for MFIs contemplating approaching these markets.

Introduction

In India, Microfinance (MF) plays a crucial role in delivering credit to poor at the bottom of the pyramid. Microfinance Institutions (MFIs) have been lending for asset building/ purchases, income generation and consumption smoothening activities to low income households in small amounts. Besides lending, many pioneering MFIs across the globe have catered financial services offering savings, remittances, insurances and other financial products to economically backward low income households, which otherwise would not have access to these products or services. Thus, MFIs play a critical role in financial inclusion (Ananth and Sahasranaman, 2011).