IFMR Trust - KFSE Presentation


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IFMR Track presented by Ms. Bindu Ananth, President, IFMR Trust, on New Financial Instruments for Social Enterprises at Khemka Forum on Social Entrepreneurship.

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  • All this is possible given the fact that regulations are silent on these issues- FLDG, etc.Example: ICICI initiated a partnership model in 2002 in which the MFI acts as a collection agent instead of a financial intermediary. This model is unique in that it combines debt as mezzanine finance to the MFI. The loans are contracted directly between the bank and the borrower, so that the risk for the MFI is separated from the risk inherent in the portfolio. This model is therefore likely to have very high leveraging capacity, as the MFI has an assured source of funds for expanding and deepening credit. ICICI chose this model because it expands the retail operations of the bank by leveraging comparative advantages of MFIs, while avoiding costs associated with entering the market directly.
  • IFMR Trust - KFSE Presentation

    1. 1. New Financial Instruments <br />for Social Enterprises<br />Bindu Ananth<br />
    2. 2. Enterprise Financing 101 <br />Expected returns of the enterprise need to be positive, for lender or equity investor<br />Lenders are providers of liquidity, not risk capital<br />Very high volatility (sales and price) poses a challenge to lenders; lenders need a cushion for bad years<br />Equity is willing to take uncertainty, but is scarce and needs to be compensated (read ROE &gt; 20%)<br />Direct equity infusion might be unviable given the size and legal nature of the average social enterprise<br />
    3. 3. New Approaches to Financing<br />Three questions to deliberate:<br />How can a not-for-profit enterprise raise risk capital?<br />Mezzanine finance<br />How can a lender take exposure to a set of clearly identifiable assets with the enterprise itself being a servicer/facilitator? <br />Securitisation/cash flow trapping/commodity finance<br />Are there trade relationships that can substitute for equity for the enterprise?<br />Receivables financing<br />
    4. 4. Case 1: Mezzanine Finance for Not-for-Profit MFIs<br /><ul><li>Most MFIs are non-profits – a poor investment ‘fit‘</li></ul>Sec 25 Cos, Trusts, Societies<br /><ul><li>MFIs need risk capital for two things:</li></ul>Risk capital to absorb unexpected losses on portfolio<br />To finance expansion in early stages of growth and profitability<br />No ‘natural providers’ of risk capital for this class of MFIs<br />Shortage of risk capital directly constraining scale-up<br />
    5. 5. Mezzanine Finance for Not-for-Profit MFIs (cont.)<br />Mezzanine finance – a innovative medium for MFIs to facilitate growth<br />Subordinated debt structures and convertible debt<br />Term loans with maturity of 3 – 7 years<br />Guarantee based instruments such as First Loss Deficiency Guarantee<br />Subscribe to Junior tranches in a securitization transaction<br />Treated like equity in the balance-sheet and enables leverage without proportionate Tier 1 equity<br />High coupon, may be combined with revenue sharing arrangement<br />No “ownership” for the mezzanine lender<br />
    6. 6. Case 2: Microfinance Securitization<br />Mechanism<br />Homogenous, high quality but illiquid financial assets are pooled to create marketable securities<br />Creates a class of portfolio that has a higher rating than the issuing company<br />Issues are usually rated by an accredited credit rating agency<br />Junior notes may be subscribed by an entity packaging the assets<br />Benefits to MFIs<br />Ability to raise finance at a relatively low cost<br />Partial or total removal of assets from its balance sheet<br />Diversification of funding sources, access to the capital markets<br />Impart pricing flexibility on the lending side and enhance return on assets deployed<br />
    7. 7. Case Study: Microfinance SecuritisationEquitas Micro Finance<br />Cash Collateral<br />(FLDG by Equitas:<br />10.6% of pool cashflows<br />‏<br />P1+ Senior Notes<br />(65%, purchased by mutual fund & bank)<br />AA Senior Notes<br />(17%, purchased by bank)<br />BBB Junior Notes<br />(18%, purchased by bank & IFMR Capital)<br />Securities with<br />periodic principal and interest payments<br />Portfolio of<br />microfinance<br />loans<br />Special Purpose Vehicle<br />Equitas Micro Finance<br />Rs 48 crore<br />Rs 48 crore<br />Credit enhancement<br />Senior note <br /><ul><li>Cash collateral by the MFI
    8. 8. Junior note subscribed by a bank and IFMR Capital together</li></ul>Junior note <br /><ul><li>Cash collateral by Equitas </li></ul>Assigns and maintains rating for the portfolio <br />CRISIL<br />
    9. 9. Case 3: Commodity Financing for Producer Co.<br />Commodity-producer co. have traditionally raised financing via straight lending, which has been constraining<br />Commodity financing could help unlock collateral value embedded within producer companies<br />Unlike traditional financing which focuses on flow of funds and the financial strength of the borrower, leverages the existence of commodity or asset to improve the credit quality of financing<br />
    10. 10. Commodity Financing for Tasar Silk Producers<br />Masuta Producers’ Co. Ltd. <br /> Profile<br />A producer company in Jharkhand, involved in processing of cocoon & marketing of yarn<br /> 2500 yarn producers; owned by village level primary groups, Mutual Benefit Trusts (MBTs)<br />Issues in financing<br />No fixed collateral<br /><ul><li>Masuta itself has very little equity, lending to Masuta not eligible for direct agri then</li></ul>Financing mechanism<br /><ul><li>Working capital loan to MBTS against commodity
    11. 11. Loan eligible as ‘direct-agri priority sector’; lower rate of interest
    12. 12. Producer co. is the servicer, providing FLDG </li></li></ul><li>Case 4: School Fee Receivables Financing<br />Rural private schools typically registered as Trust, Co. limited by guarantee or Societies <br />Schools, though, operate on a not-for-profit basis, they are in fact quite sizeable businesses and they engage in a broad range of commercial activities<br />Need of finance for improvement of school’s infrastructure and for providing other facilities<br />Lending to the Trust or Trustee not well-defined in terms of lender rights<br />
    13. 13. School Fee Receivables Financing (cont.)<br />School can raise financing against future school fee receivables<br />Predictability and granularity of receivables<br />A cash flow trapping mechanism of the fee receivables of the school<br />Students’ fee to be remitted to the lender directly and paid to school after deducting repayments<br />A village branch infrastructure required<br />
    14. 14. Case 5: Buyer-Linked Supply Chain Financing<br />Credit quality of a standalone producer very different from a producer with a robust buyer arrangement<br />A new way to release trapped cash from operations<br />Third-party financier provides liquidity to suppliers by leveraging the buyer’s higher credit rating<br />Benefits<br />Accelerating producers’/aggregators access to lower cost of capital without infusion of extra equity<br />Reduce working capital requirements through improved days payable outstanding<br />
    15. 15. Thank You <br /><br />