0% found this document useful (0 votes)
83 views10 pages

MOSEC in Microfinance SSF 2012 13

The MOSECTM structure has revolutionized MFIs' access to capital markets in India. By pooling small loan portfolios from multiple MFIs, MOSECTM transactions achieve the critical size needed to be viable in capital markets. This allows even small MFIs to participate in securitization deals. The diversification across originators and geographies provides investors an attractive risk-return profile. Centralized structuring, reporting and monitoring are important for the operational and structural complexity of MOSECTM transactions.

Uploaded by

Raju Kaliperumal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
83 views10 pages

MOSEC in Microfinance SSF 2012 13

The MOSECTM structure has revolutionized MFIs' access to capital markets in India. By pooling small loan portfolios from multiple MFIs, MOSECTM transactions achieve the critical size needed to be viable in capital markets. This allows even small MFIs to participate in securitization deals. The diversification across originators and geographies provides investors an attractive risk-return profile. Centralized structuring, reporting and monitoring are important for the operational and structural complexity of MOSECTM transactions.

Uploaded by

Raju Kaliperumal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 10

THE EUROMONEY

SECURITISATION & STRUCTURED FINANCE HANDBOOK


2012/13
Multi originator securitisation
MOSECTM in microfinance
by Vaibhav Anand and Kshama Fernandes, IFMR Capital

More than 40% of households in India do not have access to financial


services from formal channels (Roy, 2011). Microfinance institutions (MFIs)
provide a gamut of financial services to low-income households and play
an important role in financial inclusion (Sane & Thomas, 2011). Indian MFIs
have traditionally relied on banks and development financial institutions
(DFIs) for their funding requirements (Stieber, 2007). However, a major
part of bank funding is driven by regulatory requirements. Structured
finance has provided MFIs the opportunity to diversify their sources of
funding by reaching out to previously untapped debt markets.
Microfinance securitisation has given MFIs access to investors such as 29
mutual funds, private banks, high net worth individuals (HNIs) and other
financial institutions.

During the fiscal year 2011-12, Indian MFIs raised more The MOSEC TM has revolutionised the way MFIs access
than INR22bn through securitisation transactions . 1
capital markets in India.
However, small MFIs (having assets worth less than
Fernandes provides a detailed discussion on the
INR1bn) accounted for less than 15% of the funds raised 2. microfinance model and how the structured finance
A securitised pool must have a minimum critical size in approach was applied in microfinance in India to provide
order to make these transactions financially viable. Given MFIs access to reliable debt capital (Fernandes, 2011).
this constraint only large MFIs can access capital via the
In this chapter, we discuss the MOSECTM transactions in the
securitisation route. The smaller MFIs find it difficult to
Indian microfinance sector and how multi-originator
provide a critical size portfolio for single-originator
structures have helped MFIs to access debt capital and
securitisation. However via the IFMR Capital multi-
enabled investors to achieve portfolio diversification. In
originator securitisation (MOSEC TM) structure, small and the first section, we briefly discuss securitisation
medium originators can combine their loan pools to structures in microfinance and the key differences between
attain a critical size portfolio that can then be taken to single-originator and MOSECTM transactions. In the next
the market. Pooling loans across originators and section, we explain how MOSECTM structures help to attain
geographies results in a well-diversified portfolio; this critical portfolio size, enhance diversification and reduce
provides an attractive risk-return trade-off to the investor. overall risk of the transaction. Next, we discuss the

CHAPTER 5 I EUROMONEY HANDBOOKS


importance of centralised structuring, reporting and In a MOSECTM transaction the underlying pool size for each
monitoring in a MOSECTM transaction. A performance originator is typically smaller than that in a single-
TM
summary of all completed microfinance MOSEC originator transaction. This is because small pools from
transactions in India is provided in the last section. multiple originators are combined to form a critical size
portfolio. As a result, MOSECTM structures allow MFIs with
smaller sized assets to participate in securitisation
Securitisation in microfinance transactions.
In microfinance securitisation, microloans originated by
The granularity of the underlying loans (average loan size
MFIs are pooled into a stand-alone special purpose vehicle
of US$250), the high frequency of repayments (weekly,
(SPV)3. This SPV is typically established as a Trust
fortnightly or monthly) and the participation by multiple
managed by an appointed trustee. The Trust issues originators make MOSECTM transactions operationally and
securities to investors in return for a consideration that is structurally far more complex than single-originator
paid to the originators. These securities are backed by the transactions. Therefore, for MFIs who can generate large
cash flows from the pool that is serviced by the originating sized pools, single-originator transactions may prove to be
MFIs. Typically these securities are structured into more attractive.
‘tranches’ based on default risk. The cash flows are then
distributed across the tranches based on a preset waterfall
mechanism. Senior tranches are the first to be paid off.
MOSECTM: building critical mass

30 Junior tranches are subordinate in nature and only get paid


when the Senior tranche is fully repaid. Thus the Junior
A critical portfolio size is required to make a securitisation
transaction financially viable in capital markets. In order to
tranche provides additional credit enhancement to the participate in a single-originator securitisation, an MFI
Senior tranche. To ensure incentive alignment, IFMR should have a sufficiently large unencumbered portfolio of
Capital, a Chennai based non-banking financial company microloans. A small MFI with, say, a total asset size of
(NBFC) invests in the Junior tranche of all transactions INR500m may find it difficult to provide a microloan pool of
structured and arranged by it. By coming in as a size INR200m for securitisation4. MOSECTM structure allows
subordinated investor, IFMR Capital has created a pooling of small pools from different originators to attain
mainstream market for microfinance backed securitised the required critical size portfolio. In IFMR Capital MOSEC-I
paper that hereto did not exist in India. (Fernandes, 2011) the first ever multi-originator microfinance securitisation in
India, the average size of total loan assets of four
In a single-originator securitisation, microloans originated
participating MFIs was INR330m (CRISIL, 2010). The
by a single MFI are pooled into an SPV. IFMR Trust
transaction size was INR274m with an average pool size of
Pioneer-II was the first rated single-originator microfinance
INR68m per originator.
transaction in India to be placed with capital market
investors. A total of 55,993 microloans worth INR515.4m, Exhibit 1 shows the total transaction size and average pool
originated by a single MFI, were pooled into the trust size per originator for all microfinance MOSECTM
TM
(CRISIL, 2009). In a MOSEC transaction, microloans transactions in India. The figures in parentheses show the
originated by multiple MFIs are pooled into an SPV. IFMR number of participating originators in respective MOSEC TM
TM
Capital MOSEC-XII, so far the largest completed MOSEC transactions. IFMR Capital MOSEC-XI, the biggest
transaction in terms of participating originators, had microfinance multi-originator transaction in terms of size,
microloans originated by nine MFIs combined into a pool. had microloan pools from eight MFIs. The underlying pool
The transaction had 44,640 microloans worth INR472m principal was INR545m and average pool size per
underlying it (ICRA, 2012). originator was INR68m (ICRA, 2011).

CHAPTER 5 I EUROMONEY HANDBOOKS


Average pool size per originator in IFMR Capital MOSECTM (ICM) transactions Exhibit 1

600
䊏 Total transaction size 䊏 Average pool size per originator
500

400
INR m

300

200

100

0
ICM-XI (8)

ICM-VII (7)

ICM-X (6)

ICM-XII (9)

ICM-XIII (6)

ICM-III (3)

ICM-II (3)

ICM-I (4)

ICM-IV (3)

ICM-V (4)

ICM-VI (3)

ICM-IX (5)

ICM-VIII (4)
Source: IFMR Capital
31
TM
MOSEC structures allow smaller MFIs to participate
actively in securitisation transactions. Exhibit 2 shows the
distribution of single-originator and MOSEC TM transactions
by total assets of participating MFIs in all microfinance
securitisations arranged by IFMR Capital. Single-
originator transactions are skewed towards bigger MFIs
(assets more than INR1bn) whereas smaller MFIs (assets
less than INR1bn) show active participation in MOSEC TM Vaibhav Anand Dr. Kshama
Fernandes
transactions. Smaller MFIs accounted for only eight out of
Vaibhav Anand, Senior Risk Analyst
42 pools securitised in single-originator transactions
IFMR Capital
arranged by IFMR Capital. However, similar sized MFIs
accounted for 47 out of 64 pools securitised in MOSEC TM tel: +91 (0) 22 6668 7375
5
transactions . fax: +91 (0) 22 6668 7010
email: [email protected]

MOSEC : diversification across


TM
Dr. Kshama Fernandes, Senior Partner and
servicer and geography Chief Risk Officer (CRO)
TM
In MOSEC , pools from multiple originators are combined IFMR Capital
and each contributing originator acts as a servicer to its tel: +91 (0) 22 6668 7361
securitised pool. This allows investors in a MOSECTM fax: +91 (0) 22 6668 7010
transaction to diversify across multiple
email: [email protected]
originators-cum-servicers. Since the pool size per

CHAPTER 5 I EUROMONEY HANDBOOKS


Distribution of MOSECTM* and single-originator transactions by MFI** assets Exhibit 2

12
䊉 Single originators
Number of transactions closed

10 䉬 MOSEC originators

0
0 2,000 4,000 6,000 8,000 10,000
*multi-originator securitisation Asset size of Microfinance institution in INR m
**Microfinance institution

Source: IFMR Capital

32
originator is a small portion of total transaction size, For a given set of microloan pools, this diversification results
diversification across servicer reduces the overall servicer in superior performance for MOSECTM transactions when
risk of the transaction. compared to the performance of single-originator
transactions with the same microloan pools. In this section,
MOSECTM transactions also offer a high degree of
to illustrate the effects of MOSECTM diversification, we use
geographic diversification in the portfolio. Typically small
the historical default-instance distributions for three MFIs.
MFIs have regional focus limited to certain geographies or
6 TM The default-instance distribution is a probability distribution
states . MOSEC allows investors to reduce their
geographical concentration risk while allowing regional of observed default-instances7 for each microloan portfolio

originators to focus on operational efficiencies in their originated by the respective MFI. We compare the

respective geographies. Also, diversifying across states performance of three hypothetical single-originator
and districts helps to reduce political and event risks in a transactions to the performance of a hypothetical MOSECTM
transaction. transaction with microloans originated by three MFIs
underlying it. The MFI default-instance distributions used
Exhibit 3 compares diversification provided by select
here have been estimated using the performance of
MOSECTM and single-originator transactions. MOSECTM
securitised microloan pools of the three MFIs (Anand &
transactions provide higher diversification across
Fernandes, 2012). We refer to these MFIs as MFI-A, MFI-B
originators and geographies.
and MFI-C. The first panel of Exhibit 4 shows the estimated
default-instance distribution for three MFIs8.
MOSEC : understanding underlying
TM
Assume that each MFI participates in a single-originator
default risk transaction and each transaction has a microloan pool of
MOSECTM structures reduce overall transaction risk through size INR300m underlying it. Also, assume that all
increased diversification across originators and geographies. underlying microloans in a pool are of equal size. Based on

CHAPTER 5 I EUROMONEY HANDBOOKS


Diversification of select MOSECTM* and single-originator transactions Exhibit 3

Transaction IFMR Capital IFMR Capital IFMR Capital IFMR Capital


name Gamma pioneer Zeta pioneer MOSEC-IX MOSEC-XII
Transaction
type Single-originator Single-originator MOSECTM MOSECTM
Transaction
INR1063.8m INR468m INR258m INR472m
size
Exposure Originators: 1 Originators: 1 Originators: 5 Originators: 9
details States: 4 States: 3 States: 9 States: 12

Originator-wise
diversification

Geography (state)-
wise diversification

33
*multi-originator securitisation

Source: IFMR Capital

Default distribution of MOSECTM* and single-originator transactions Exhibit 4

100% Single-originator 100% MOSEC

80% 80%
—— MFI-A** —— MOSEC (0)
—— MFI-B** —— MOSEC (0.25)
Probability

Probability

60% 60%
—— MFI-C**
40% 40%

20% 20%

0% 0%
0% 1% 2% 3% 0% 1% 2% 3%
Default instances (%) Default instances (%)
*multi-originator securitisation **Microfinance institution

Source: IFMR Capital

CHAPTER 5 I EUROMONEY HANDBOOKS


Maximum default-instances calculated for a given confidence level Exhibit 5

Single-originator transaction MOSEC TM** Transaction


Confidence level MFI-A* MFI-B* MFI-C* Correlation=0 Correlation=0.25
95% 1.47% 0.57% 1.23% 0.82% 0.90%
99% 2.01% 0.63% 1.35% 0.99% 1.08%
99.99% 2.24% 0.68% 1.41% 1.24% 1.35%
*Microfinance institution **multi-originator securitisation

Source: IFMR Capital

the historical default-instance distribution of each performance of MOSECTM transaction is simulated using the
originator, the default-instance distribution of underlying default-instance distribution of each originator. The
pools can be estimated as shown in first panel of Exhibit 4. simulations are performed for two scenarios; first with the
assumption that the three microloan pools have zero
Using this distribution, we calculate the maximum number
correlation among them and the second with the
34 of default-instance to be observed at a certain confidence
level for three single-originator transactions. The
assumption that pools have a correlation of 0.25 10. The
default-instance distribution for the MOSECTM transaction is
calculated values are tabulated in columns two-four of
estimated for different correlation values: correlation=0
Exhibit 5. For the single-originator transaction with MFI-A,
there are 99.99% chances that the observed defaults will and correlation=0.25. The estimated distributions for the

not exceed 2.24% of the underlying pool. At this MOSECTM and single-originator transactions are compared

confidence level, credit cover of 2.5 times against in Exhibit 4.

microloan defaults translates into credit-enhancement of Maximum default-instances to be observed at certain


INR16.8m for MFI-A single-originator transaction 10. Similar confidence levels in the MOSECTM transaction are calculated
calculation results in credit-enhancement requirement of using the estimated distribution. These values are
INR5.2m and INR10.6m for single-originator transactions tabulated in columns five-six of Exhibit 5. At 99.99%
with MFI-B and MFI-C Respectively. Thus the total credit- confidence level, the total credit-enhancement requirement
enhancement required from all MFIs is INR32.6m. to provide 2.5 times credit cover against default risk is
The term ‘credit-enhancement’ is used as a credit cover INR27.8m for zero correlation among microloan pools of
against the microloan default risk only. The actual credit- MFIs11. Credit-enhancement for each originator is calculated
enhancement requirement in a microfinance securitisation by allocating the total credit-enhancement in proportion to
typically accounts for other factors as well e.g., current the maximum default-instances observed at 99.99%
state of the microfinance industry, political risk and confidence level for each MFI.
strengths and weaknesses of originators.
Exhibit 6 compares credit-enhancement requirement from
Now assume a scenario where the microloan pools of three each MFI under single-originator and MOSECTM
MFIs are combined in a MOSECTM transaction. The transactions. Credit cover requirement against default risk
transaction size is INR900m and each originator is less for all MFIs when their microloans are combined in a
contributes INR300m worth of microloans. The MOSECTM transaction.

CHAPTER 5 I EUROMONEY HANDBOOKS


Credit-enhancement requirement under MOSECTM* and single-originator transactions Exhibit 6

18
16 䊏 MOSEC (Corr = 0)
Credit-enhancement to provide
2.5 times credit cover (INR m)

14 䊏 MOSEC (Corr = 0.25)


䊏 Single originator
12
10
8
6
4
2
0
MFI-A** MFI-B** MFI-C**
*multi-originator securitisation Originator
**Microfinance institution

Source: IFMR Capital

35
Centralised structuring, reporting originators’ MIS and IT capabilities to ensure their
post-transaction compliance with reporting requirements.
and monitoring
Post-transaction monitoring of originator-cum-servicer
In a MOSECTM transaction the microloans from multiple
operations is essential to ensure consistently high
originators are pooled into a single Trust. The securities
performance. It enables the detection of early warnings
issued to investors are backed by cash flows from the
and stress signals which can then be addressed in time. In
pooled microloans. These cash flows are tranched
MOSECTM transactions, the required monitoring effort
depending upon the investors’ risk-return requirements.
increases many fold due to the presence of multiple
However, the timing and frequency of the cash flows may
originators. However, MOSECTM transactions help build
vary significantly from one originator to another. Thus an
efficiencies through centralised processing of the
effective MOSECTM structure requires adequate structuring
transaction. The structuring and performance management
and underlying sector expertise.
functions are typically centralised and offer economies of
Reporting and monitoring are two of the key components scales when pools of multiple originators are combined.
of risk and performance management in a securitisation Since the closure of the first MOSEC TM transaction in
transaction. Servicers report the collections, pre-closures, January 2010, IFMR Capital has consistently demonstrated
prepayments and overdue cases for every collection the usefulness, performance and sustainability of the
period. These reports form the basis of all risk and structure for enabling access to capital for small and
performance analysis for the transaction. In MOSEC TM medium sized MFIs. The same model with similar outcomes
transactions, the challenge is to ensure uniform reporting could be used for any asset class provided the same
standards across the servicers to maintain data integrity. It standards of high quality origination, structuring and risk
is essential to perform a pre-transaction due diligence of management are applied.

CHAPTER 5 I EUROMONEY HANDBOOKS


Performance of completed MOSECTM** transactions Exhibit 7

Transaction Collection
Date Transaction name Number of MFIs* Rating agency size (INR m) efficiency
15-Jan-10 IFMR Capital MOSEC-I 4 CRISIL 308.6 99.03%
14-May-10 IFMR Capital MOSEC-II 3 CRISIL 353.7 97.54%
16-Sep-10 IFMR Capital MOSEC-III 3 CRISIL 368.8 98.95%
17-Jun-11 IFMR Capital MOSEC-IV 3 ICRA 272.3 98.54%
30-Jun-11 IFMR Capital MOSEC-V 4 ICRA 269.0 99.67%
02-Aug-11 IFMR Capital MOSEC-VI 3 ICRA 276.3 98.37%
21-Aug-11 IFMR Capital MOSEC-VII 7 ICRA 511.9 99.77%
07-Oct-11 IFMR Capital MOSEC-VIII 4 ICRA 200.9 98.73%
09-Nov-11 IFMR Capital MOSEC-IX 5 ICRA 248.1 99.98%
12-Dec-11 IFMR Capital MOSEC-X 6 ICRA 492.8 100.00%
27-Dec-11 IFMR Capital MOSEC-XI 8 ICRA 574.6 99.91%
23-Feb-12 IFMR Capital MOSEC-XII 9 ICRA 472.1 99.87%
30-Mar-12 IFMR Capital MOSEC-XIII 6 ICRA 351.2 100.00%

36 *Microfinance institutions **multi-originator securitisation

Source: IFMR Capital

Reference: 5. Stieber, S. (2007). Is Securitisation right for


microfinance? Innovations: Technology, Governance,
1. Roy, D. (2011). Financial inclusion in India: emerging
Globalization, 2, 203-213.
profitable models. In Compendium for BANCON 2011-
Indian Banks’ Association (page 129-134). Conducted at 6. CRISIL (2009). IFMR Trust Pioneer II-Rating Report.
Chennai. 7. ICRA (2012). IFMR Capital MOSEC XII-Rating Rationale.
2. Fernandes, K. (2011). A structured finance approach to 8. CRISIL (2010). IFMR Trust MOSEC I-Rating Report.
microfinance. In The Euromoney Securitisation &
9. ICRA (2011). IFMR Capital MOSEC XI-Rating Rationale.
Structured Finance Handbook 2011/12 (page 56-64),
Notes:
Euromoney Yearbooks. 1 IFMR Capital arranged securitisation transactions worth INR8bn
3. Anand, V. & Fernandes, K. (2012). Estimation of default during 2011-12. MFIs SKS Microfinance and Bandhan Microfinance
together completed securitisations for around INR14bn during the
distribution of unsecured microloans given to low-
period.
income households. Unpublished manuscript, IFMR
2 Source: IFMR Capital.
Capital, Chennai. 3 Committee on Global Financial System (2005) identifies three

4. Sane, R. & Thomas, S. (2011). A policy Response to the features of structured finance: pooling of assets, tranching of
liabilities backed by pool cash flows and delinking of credit risk
Indian microfinance crisis (Working paper-2007-11).
through an SPV.
Retrieved from Indira Gandhi Institute of Development
4 Average portfolio size for all securitisation transactions arranged by
Research website: http://www .igidr.ac.in/pdf/publication/ IFMR Capital is INR250m.
WP-2011-007.pdf 5 Source: IFMR Capital.

CHAPTER 5 I EUROMONEY HANDBOOKS


6 A State is a federated territory in a federal union of states. There are
28 states and seven union territories (ruled by federal government Contact us:
directly) in India.
IFMR Capital
7 A single instance of payment failure on the scheduled repayment
date or late payment is classified as ‘default-instance’. 10th Floor, IITM Research Park, Taramani,
8 The default distribution of microloan pool in a single-originator
transaction is same as the default distribution of the originating MFI. Chennai- 600113, Tamil Nadu, India
It is assumed here that portfolio quality and business environment
Tel: +91 (0) 22 6668 7000
for the MFI will remain fairly constant with time.
9 2.24%x2.5x300m≈INR16.8m. email: [email protected]
10 In a study conducted by IFMR Capital, the average positive
correlation among its seven MFI partners was estimated to be 0.20.
web: http://capital.ifmr.co.in/
11 1.24%x2.5x900m≈INR27.8m.

37

CHAPTER 5 I EUROMONEY HANDBOOKS

You might also like