more thoughts on microcredit securitization
Hmm…I was a bit wrong about the ICICI microcredit securitization deal yesterday. Actually it works like this. Share Fin is a micro finance institution. Now what’s transpired is Share Fin securitizes $4.3 million of their loans and ICICI purchases these securities, with the agreement that the interest and principal repayments will now go to ICICI but with Share Fin acting as the collector. Grameen bank acts as a guarantor putting up around $250,000 or so in ICICI as collateral.
So basically, its gone off balance sheet for Share Fin, not ICICI. This means ICICI is going to try and create a secondary market for microcredit so that they can offload the securities if it suits them or if things get iffy later.
Like I said earlier, as the securitization trend catches on and momentum in secondary markets increases, micro finance will become cheaper, and more credit will flow into that sector of the economy. Which is surely very good.
On the other hand, now that Share Fin has received its payments in advance, I have to wonder if the default probabilities will increase from the current very low 0.5%. And while convenants might be in place between Share Fin and ICICI, over a period of time as the secondary market expands, the default rates are likely to go up. (For ICICI in fact, investing in micro credit is also an effective risk management tool given the low default rates currently)
Here’s the thing. Today corporate defaults happen every now and then, in fact default is no longer that much of a bad word, its something that is even forgiven. Restructuring of debt happens all the time. Unfortunately that attitude has not quite percolated into the lower strata of society where despite their problems, most people feel guilty about defaulting on loans. As people get the hang of microcredit securitization, and as bigger players enter the game, me thinks defaults will become less of an issue and that attitude will percolate down to the people who actually borrow.
Now from a macro perspective whether this general trend is good or bad, I don’t quite know.