The securitisation volume in the microfinance segment - which witnessed a decline in the first half of the current fiscal - is likely to improve in the second half on better investor confidence and higher funding requirement in the sector, according to a report.

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During the first half of the current fiscal, securitisation volume in NBFC-MFI segment dropped to Rs 600 crore, compared to around Rs 14,000 crore in H1 FY2020 on account of disruptions caused by the COVID-19 pandemic, rating agency Icra said in a report.

"Securitisation volumes in the NBFC-MFI sector will be significantly higher in H2 FY2021 compared to H1 FY2021 driven by active participation from higher-rated NBFC-MFIs and restoration of investor confidence supported by improving collections of most of the entities in the sector in the post moratorium period.

"Further, notwithstanding any sharp increase in COVID-infected cases in rural parts of the country or any further lockdowns, disbursements in the sector are expected to witness healthy improvement, which would raise funding requirements and thus support securitisation volumes in H2 FY2021," Icra vice president and head (structured finance ratings) Abhishek Dafria said in the report.

Dafria said the securitisation volume in the microfinance segment could reach to around Rs 6,000-7,000 crore during H2 FY2021.

He said the lower-rated NBFC-MFIs entities (i.E. Rated BBB+ and lower) would still find it difficult to raise funds through securitisation until there is visibility on recovery in collections and limited migration of delinquencies from softer to harder buckets.

The proportion of lower-rated entities raising funds through securitisation is expected to be much lower in FY2021 compared to the previous year, he added.

Over the past three fiscals, the share of lower-rated microfinance entities in the overall securitisation volume of NBFC-MFIs has remained in the range of 20-30 per cent.

However, the same dropped to around 7 per cent in H1 FY2021 due to investors' concerns regarding the expected weakening in the credit profile of the underlying borrowers and the respective entities as well.
"Lower rated entities that are typically geographically concentrated may need to exhibit steady collections over a longer period before they find favour in the securitisation market," the report said.

The availability of eligible assets for securitisation in the books of smaller NBFC-MFIs has shrunk due to existing assets remaining under moratorium and negligible fresh disbursements during H1 FY2021, it added.

Since the majority of the smaller NBFC-MFIs have not benefited much from the funding support and facilities announced by regulatory and development institutions during the pandemic, they are expected to find it more challenging to manage their regular debt repayments amid lower than pre-COVID collections, it said.

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These entities will also find difficulties in raising fresh funds from their conventional sources on account of heightened lenders' concern regarding the stability of their credit profiles and the recent instances of corporate governance issues in the sector, the report said.