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Reduced cost of capital for an emerging MFI

IFMR Trust has provided credit protection in the form of a guarantee to a portfolio of agricultural loans originated by Bharat Integrated Social Welfare Agency (BISWA), a microfinance institution (MFI) in Orissa. The protection is limited to 45% of the portfolio size of INR 230 million (USD 5.75 million) and ranks subsequent to a First Loss Default Guarantee of 5% of the portfolio size provided by the originator. The tenure of the portfolio is one year. Grameen Capital India Ltd (GCIL) was the arranger and structurer in the transaction, which was placed in the banking sector.

The bank concerned has bought out the portfolio at an interest rate of 6% -- that is, 150 basis points lower than the one-year G-Sec rate in India. This, after taking into account the guarantee and structuring fee, resulted in a net pricing to BISWA that is very attractive in the context of emerging MFIs.

Size: INR 230 million (USD 5.75 million)
Tenure: 1 year
Guarantee: 5% First Loss Default Guarantee provided by originator -- BISWA -- and 45% Second Loss Guarantee by IFMR Trust
Initial IFMR Trust Guarantee Amount: INR 105.9 million (USD 2.65 million)
Interest rate to bank: 6% per annum (150 basis points lower than one-year G-Sec rate in India)

Thus, IFMR Trust's provision of a second loss credit enhancement enabled BISWA, an emerging MFI, to obtain funding through a structured finance transaction at a rate more favourable than the rates that it would otherwise have got from the market.

This is anticipated to open up a new set of financing options for MFIs in the country which lend to small agricultural farmers.

Bindu Ananth, President, IFMR Trust said: "This is the first in a series of structured transactions that IFMR Trust has participated in that will dramatically reduce the cost of funds for MFIs and eventually microfinance clients."

Royston Braganza, CEO, Grameen Capital India, said: "There is tremendous value in the portfolio created by MFIs. Grameen Capital will continue to enable MFIs to benefit from this value, through innovative structured solutions and strategic portfolio placement."

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