Securitization Module

High Level Overview

Securitization transctions have begun to take place in the Microfinance sector. For those of you new to this term, securitization is a transaction in which an MFI sells part of its portfolio to in a bank or another financial institution. In India, several of these deals have occured-- spurred, in part, because there are government regulations that stipulate that a certain % of a bank's loan portfolio must be given to "priority lending sectors" (poor, farmers, etc). If banks don't hit their quotas, they are penalized. Because of the difficulty traditional banks have of reaching this market, several banks have entered into securitization deals with MFIs as a way to target these priority sectors and hit their priority lending quotas. Unlike more traditional securitization deals, these loans are not backed by collateral. In additional, the loan portfolio has not been broken down into tranches that can be seperately traded. Instead, the MFIs have broken down their portfolio by branch-- and have sold the entire portfolio of several branches to the bank.

Note that there are likely other securitization deals that involve the segmentation of their portfolio into tranches (see references to the Blue Orchard deal mentioned in the papers below). More research will need to be done in this area.

Securitization Requirements for Mifos

We need to research securitization deals in the MFI sector to determine what additional functionality, if any, is required to be built into Mifos. Examples of what these requirements might be include:

  • Ability to segment loan portfolio into various tranches that can be individuall tracked and reported on (Note: I'm skeptical that this is an immediate requirement for the sector. Going forward, these deals will likely evolve into tranche purchases, but unclear the extent of this currently.)

Could this be achieved via current functionality of "funding source"? Would probably work, although not elegantly.

  • Ability to allow banks to log into Mifos and see only the loans/accounts that they've purchased: ie, by tranche or by branch. (Question: do banks really need/want this level of access-- ie, to the individual account level? What about other non-loan accounts held by individuals like savings, insurance? Note that in India, several of the securitization deals have also involved converting the branches to be "agent branches " for the bank-- so access to non-loan account info would probably be desired/required)
  • On demand reporting that allows banks to login to Mifos and generate reports only for their portfolio
  • Automated reporting that automatically generates and sends transactional data to banks on their portfolio

Much more research is needed in this area especially on how loan portfolios have been segmented during securitization deals and also on what reporting requirements have been stipulated for these deals.

Some articles on the subject:

I encourage others to search for additional relevant articles and post them here.

– Main.emilytucker - 30 Mar 2005