India: Mutual Funds Turn to Micro-finance Investment for Returns Kick

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Jan 2010
Mumbai, India, January, 08 2010 - In their bid to boost returns on fund portfolios, especially debt funds, asset management companies (AMCs) have started looking at investment options in the bustling micro-finance sector.

Returns on your mutual fund portfolios would soon bear the fragrance of roses and lilies grown in micro-credit-funded nurseries on the foothills of the Himalayas. Among highly-rated corporate paper and listed shares in your investment portfolio, you would find a seemingly benign NGO-funded bio-gas project from Uttaranchal or a livestock farm from drought-hit Vidarbha.

In their bid to boost returns on fund portfolios, especially debt funds, asset management companies (AMCs) have started looking at investment options in the bustling micro-finance sector. Several fund houses are weighing options to include securitised and rated paper, in their bid to add a “return-kicker’ on their portfolios. Annualised returns on investments in micro-finance institutions (MFIs) would be in the range of 12-15%, fund industry sources said.

In a first of its kind, ICICI Prudential Asset Management, along with Axis Bank and Dhanalakshmi Bank, has invested in a rated and securitised offering by Chennai-based Equitas Micro Finance. The Rs 48-crore deal is backed by over 50,000 micro-loans; rating agency Crisil has assigned P1+ (highest possible rating for a short-term paper), ‘AA’ and ‘BBB’ ratings to the issuances by Equitas Microfinance.

While banks constantly try to increase their investment in the microfinance sector through rated and tradable securities, mutual fund investments in micro-credit institutions are still considered a rarity. According to MFI sources, ICICI Pru has invested into paper issued by Equitas Microfin on the basis of higher rating, favourable risk-reward ratio, credit enhancement options and strong collection performance of the underlying pool.

By investing in micro-loan backed securities, mutual funds and other institutional investors can own an asset that is both high in quality and low in correlation to other asset classes.

“Securitised and rated paper from a micro-finance company could be treated on par with any corporate issuance of that grade,” said Krishnan Sitaraman, head-fund services, Crisil Fund Services.

“There is a credit enhancement option in securitised paper that takes care of credit defaults. Generally, investments in micro-finance companies give funds an opportunity to diversify their investments. A rated security-backed paper from a well-conducted MFI could be a good asset in fund portfolios,” Mr Sitaram added.

Loan default is not very common in social financing. As a matter of fact, non-performing assets (NPAs) for most rural micro-finance firms could even be lower than 1% of their net worth. This is much lower than our top-rung banks, expert say.

To get an idea about the size of micro-finance business, there are about 10 crore borrowers, 80% of whom are served by existing microfinance institutions. Inflows into micro-finance schemes and other social projects have resulted in lending touching $15 billion in 2008.

“The problem lies getting a meaningful exposure in such paper. Such projects would need very less investment, much less than what a fund house needs to lend to make a meaningful investment,” said A Balasubramanian, CEO, Birla Sunlife Asset Management.

According to Mr Balasubramanian, collateralised paper issued by MFIs will greatly diversify the portfolio mix, if included in a fund scheme. “But then, there is always a higher risk factor while lending to MFIs. We’ll evaluate this investment option on merit basis. We’ll clearly analyse the risk and reward factors involved in such investments. Significantly, higher returns and easy pricing structure will play a crucial role in reaching upon an investment strategy,” Mr Balasubramanian added.

According to the fixed income manager of domestic fund houses, corporate treasuries, initially, will not be pleased with investments in MFIs. But as the sector progresses, mutual funds will have to invest in micro-finance assets to better portfolios performance, he added.

 

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