By Nandita Prabhu and Rajesh Keswani, IFMR Capital
Recently IFMR Capital hosted its third Investor Seminar in Mumbai. The theme of the seminar was ‘Risk Underwriting in Asset Classes that Impact Low-Income Households’. The seminar, aimed at showcasing the emerging asset classes that IFMR Capital works with in an effort to bring about a better understanding of these asset classes, saw very good participation from investors as well as other distinguished guests who have demonstrated a keen understanding and rich experience in these asset classes. In addition, the seminar sought to explain IFMR Capital’s work in modelling default risk – the backbone of IFMR Capital over the last 4 years, across the three asset classes we work in, viz. microfinance, micro enterprise finance and affordable housing finance.
The seminar began with a short introduction by Dr. Nachiket Mor on the role of institutions (such as IFMR Capital) in bringing about effective transfer of risk from localised regional players working with rural and semi-urban borrowers to highly capitalised mainstream financial institutions, while ensuring complete alignment of interest of the originator as well as the investor. He highlighted how these institutions work with quality originators serving high potential local markets on the one hand and well capitalised debt market investors on the other hand. He described IFMR Capital’s value proposition as functioning as a bridge institution by providing investors access to high quality rated assets without them having to build their own origination machinery, while benefitting from underwriting and surveillance machinery of IFMR Capital.
Dr. Kshama Fernandes, CEO of IFMR Capital, then presented IFMR Capital’s risk modelling and default analysis frameworks. She detailed how the risk management culture, embedded in the IFMR style of functioning has helped build a strong association between the origination and risk functions. In this model, the risk department plays a significant role in deciding what entities IFMR Capital will work with, what portfolios to build etc., and this close association has proven to be one of the key reasons for the success seen by IFMR Capital in the 70+ transactions structured so far. Explaining the reason for the emphasis on risk management, Kshama added that the IFMR business model where we wear the investor hat and act as principal investor in every transaction that we help take to the capital markets allows us to get insights into real risk on these transactions. She also spoke of the risk modelling work and the default distribution models developed by the IFMR Capital Risk Management team and stressed the need to go beyond collection efficiency and PAR – the two ratios which have historically been the benchmark for assessing institutions in this sector. Kshama concluded by giving the audience an insight into how IFMR Capital measures risk by assessing both the mean as well as the volatility of defaults, with the latter being a better indicator of risk in the sectors we work.
The conference also hosted a panel discussion with Mr. Ramraj Pai (Director, SME Ratings, CRISIL) as the moderator and Mr. Conrad D’ Souza (Member of Executive Management, HDFC), Mr. Hasib Ahmed (Principal Investment Officer, Asian Development Bank), Mr. Sanjay Agarwal (Managing Director and Founder AU Financiers), Mr Madhusudan Menon (Managing Director and Founder – Micro Housing Finance) and Mr Brahmanand Hegde (Managing Director and Founder – Vistaar Financial Services) as participants. Mr. Pai commenced the discussion with his views on the various emerging asset classes of affordable housing and MSME business and offered a rating perspective for the same.
Drawing from his experience working at rating agencies, Mr. Pai highlighted the issues rating agencies typically face pertaining to location concentration, inability of assessment of income for the customers of these asset classes, the difficulty in estimating the credit worthiness of first time borrowers etc. He also briefly addressed the limitations of transactions/entities functioning in these areas of business. Mr. Menon, while discussing underwriting micro housing loans highlighted the problem that limited information brings when only around 50% of borrowers have some sort of credit information in databases. Information available in these databases could be used against a borrower who is seen to not be credit worthy, while a similarly placed borrower might get a loan approved because his/her credit worthiness is not listed on any database. Mr. Menon added that while underwriting loans, they derived some comfort from the knowledge that most of the borrowers have some sort of savings, though it might not be formal.
Mr. Hegde opined that while information on credit worthiness remains limited, there is a need to look beyond standard documents for testing credit worthiness, especially across different industries. He also identified the issue of hiring and training good credit managers as the biggest challenge in his business.
Mr Conrad’s views on lending to the said sector backed by various alternate techniques to evaluate eligibility of the customer and assessment of household income then drove the discussion northwards. His views were further strengthened and backed by Mr. Sanjay Agarwal who emphasised that there are reliable tools which if appropriately assessed could bring up a near-to-accurate assessment of the individual/business’s incomes and could be an innovative avenue to lend to this customer class/customer segment. Mr. Agarwal also identified that borrowers in this customer segment have comparatively more equity in the transaction as compared to urban borrowers which would be an incentive and a driving force to lend to this segment if income could be substantiated by alternate methods to the closest actual earnings. Mr. Pai then called upon Mr. Ahmad for his views on financing structures for informal lending models, and also commented on the recent partial guarantee program for microfinance institutions signed by the ADB for India in partnership with IFMR Capital. Mr. Ahmad recognised that partnering with institutions like IFMR Capital would allow ADB to build its own knowledge base and understanding of the sector. Further, the ADB model, being scalable and if received well by capital markets would reduce cost of financing further, which can then be passed to the end borrower. Mr. Ahmad’s well founded belief is that this program with its opportunities for on-the-ground monitoring and learning, could with time be implemented in other geographies as well, thus serving ADB’s 2020 vision of an Asia and Pacific free of poverty.
Video from the event: