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Microfinance Summit Presentation - IFMR Capital

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  • Industry utility – creating infrastructure for efficient and reliable flow of capital to high quality originators-Learn from the monolines, guaranty companies’ mistakes in the west
  • November 2009
  • -Banks prefer to lend Jan-March, in time to meet regulatory targets-Bank credit expanding slower than microfinance sector (40% tgt PSL)-$18 billion+ in fixed maturity // liquid plans...ABS mkt was $12 bil in March ‘0-Additional investor scrutiny
  • -Equitas has a 2 year loan product, hence longer dated maturities
  • Implications:New investor base- mutual fund and bank treasuriesLower cost of funds for MFIsMarket standards developing for evaluating the credit quality of micro-loan portfolios originated by MFIsEnhanced transparency and disclosure via capital markets oversight of sectorEmergence of ‘BBB’ demandPrice discovery and liquidity (mkt making, portal)
  • For MFI’s with 1 yr loans, the portfolio can potentially be securitised to access an even shorter term, lower cost portion of the yield curve
  • -Fortnightly payments
  • -Geographic & institutional diversification to investors-Rating agency was more conservative on CC given the quick growth of some MFIs-Treasury desk
  • WRF loan portfolio is very small. It is approx 9-10 customers with Rs. 8.55 lakhs. All loans not repaid. -NSEL offering avg 2-4% better price than Mandi
  • 0:50 branch starts
  • Transcript

    • 1. Debt Finance Techniques forMFIs and Agri-CommoditiesMicrofinance & Sustainable Development Summit
      January 27, 2010
    • 2. Outline
      About IFMR Capital
      3 Cases
      Equitas micro-loan securitisation (IFMR Trust Pioneer II)
      Multi-originator micro-loan securitisation (IFMR Capital MOSEC I)
      Commodity-backed warehouse receipt financing
    • 3. IFMR Capital
      Mission
      “To provide efficient and reliable access to capital
      for every institution that impacts low-income households”
      IFMR Capital is an Indian non-banking finance company (NBFC) functioning as a financial guarantee company, setup in 2008.
      Sectors of focus include:
      Microfinance
      Agri-commodity backed finance (pilot)
      Small enterprise finance (pilot)
      Part of IFMR Trust, based in Chennai, India
      IFMR Rural Finance (Regional rural financial institutions)
      IFMR Mezzanine Co. (Mezz finance for MFIs)
      IFMR Ventures (Incubates & invests in rural supply chain companies)
    • 4. Financial System Design
    • 5. Our Role in Transactions
      • Pre-purchase
      • 6. Market intelligence
      • 7. Due diligence of MFIs based on Underwriting Guidelines
      • 8. Evaluation of portfolio to be purchased
      • 9. Structuring the transaction
      • 10. Modeling expected cashflows
      • 11. Legal due diligence
      • 12. Working with the rating agency
      • 13. Negotiations with the investors
      • 14. Finalisation of transaction structure
      • 15. Providing second loss credit enhancement
      • 16. Post-purchase
      • 17. Continuous follow-up on underlying portfolio with originator
      • 18. Market-making in securities issued
    • Case IIFMR Trust Pioneer IIFacilitating a mutual fund investment into micro-loan backed securities
    • 19. IFMR Trust Pioneer II 1st Mutual fund investment
      Context
      No deposits or external debt for NBFC-MFIs
      Regulatory driven lending (seasonal, concentrated)
      Indian mutual funds: seeking short term assets
      Securitization: how to promote healthy structures?
      Aim
      To establish microfinance as a high quality asset class
      Demonstrate a P1+ rating for a micro-loan backed securitization
      Legal form: Tradable security
      Widen sources of finance for MFIs to key capital markets investors such as mutual funds and bank treasuries
      Set a new pricing benchmark for microfinance securitizations
      Promote structures that are capital efficient (Par vs premium)
      Establish market standards for evaluating the credit quality of micro-loan portfolios originated by MFIs
    • 20. IFMR Trust Pioneer II – November 2009
      IFMR Trust Pioneer II
    • 21. Structure
      P1+
      65% of Pool
      $7 MM
      Investors
      Equitas (MFI) sells 55,993 micro-loans
      ICICI-Prudential AMC, Dhanalakshmi Bank
      1
      SPV buys loans and issues PTCs (securities)
      3
      Axis Bank
      AA
      17% of Pool
      $1.8 MM
      2
      CRISIL (S&P) rates securities
      BBB
      18% of Pool
      $1.9 MM
      IFMR Capital,
      Axis Bank
      Cash Collateral
      10.6% of Pool
      Equitas (MFI) bears first loss risk
      IFMR Trust Pioneer II
    • 22. Time Tranching
      Accessing <1 yr portion of yield curve improved pricing benchmark
      Commercial paper rated P1+ yielded approx 5-6% at time of deal
      IFMR Trust Pioneer II
    • 23. Case IIIFMR Capital MOSEC IFacilitating access to capital markets for small MFIs
    • 24. IFMR Capital MOSEC I 1st Multi-originator securitisation
      Context
      500+ small & medium sized MFIs (100 million unbanked households)
      Indian banks have consolidated lending to largest 10-20 MFIs
      Cost of borrowing avg 12-15%
      Small MFIs lack sizeable unencumbered portfolio for securitization
      Revolver securitization structure not captured by RBI guidelines
    • 25. Loan-to-Originate Product
      After due diligence, if a small MFI meets Underwriting Guidelines & Eligibility Criteria, IFMR Capital provides short-term liquidity (2-4 month loans) for MFIs to originate portfolio
      Portfolio can then be pooled with other small MFIs’ portfolios and securitized
      -The unencumbered portion of their portfolios is minimal
      -IFMR Capital issued line of approx $1 MM to each MFI to make fresh loans
      IFMR Capital MOSEC I
    • 26. IFMR Capital MOSEC I – Summary, January 2010
      IFMR Capital MOSEC I
    • 27. Structure
      P1+
      76% of Pool
      $5.2 MM
      Investors
      Asirvad
      Sahayata
      Sonata
      Satin
      Dhanalakshmi Bank
      1
      SPV buys loans and issues PTCs (securities)
      3
      Unrated
      24% of Pool
      $1.6 MM
      IFMR Capital
      2
      CRISIL (S&P) rates securities
      Cash Collateral
      13% of Pool
      All 4 MFIs bear first loss risk
      IFMR Capital MOSEC I
    • 28. Case IIIAgri-Terminal Markets Network EnterpriseFacilitating access to markets & credit for small farmers
    • 29. Farmers’ Dilemma
      Farmers want price upside:
      Prices are the lowest at harvest time.
      Solution:
      Warehouse receipt financing
      Farmers also need liquidity:
      A need for cash today leads to forced selling at low prices.
      Solution:
      Local access to commodity exchanges & end buyers
      Farmers need market access:
      Local mandi & middlemen offer low prices vs national exchanges
    • 30. Access to markets
    • 31. Access to risk management tools
    • 32. Access to commodity market and credit
      Finance partner for loans
      ATMNE Branch
      Clearing & Trading member of NSEL
      Nat’l Spot Exchange
      4. Provide cash / loan
      3. Sell or Lodge w/h receipt
      Farmer / Trader
      1. Deposits Commodity
      IFMR Rural Finance or MFI
      Warehouse / 3rd party Collateral Manager
      2. Issue warehouse receipt
      A choice to farmer to sell spot or to hold for future
    • 33. ATM NE: Dharampur Village, Gujarat
    • 34. Way forward
      • Sharing of ground level experience and technical expertise learned in pilot
      • 35. Replication through partnerships with MFIs, NGOs and Cooperative societies.
      • 36. ATMNE will provide trading and settlement backend to partners
      • 37. Exploring ways to accredit warehouses for storage of commodities in rural areas and taking grading, sorting and packaging services close to farmers
      • 38. Short distance commodity transportation pilots to facilitate farm to market as well as inter-markets movement
      • 39. Transportation exchange to enhance the scope of trade on electronic exchanges
    • Peter Bremberg
      Peter.bremberg@ifmr.co.in
      Team Email
      capital@ifmr.co.in
      Website: www.ifmrcapital.com
      Blog: www.ifmrblog.com
      1, Cenotaph Road | Teynampet | Chennai - 18
      www.ifmrcapital.com
    • 40. Product and Market DevelopmentPricing and Evaluation Framework
      Perception of due diligence team
      Evaluation based on benchmarks
      Scoring is on a 5-point scale: 0, 5, 10, 15 & 20 across each of the above sections.
    • 41. Product and Market DevelopmentPricing and Evaluation Framework
    • 42. Click next to see an ATMNE Video
    • 43. Farmer Education
    • 44. Trading Platform
    • 45. Quality Testing of Groundnuts