Paper
Alternative Financing for Indian MFIs
Analyzing feasibility of alternative financing for MFIs
2 pages
This Focus Note analyses different forms of alternative MFI financing, with a focus on Indian MFIs.
Unlike traditional methods of funding, MFIs can use alternative financing options that are not reflected on their balance sheets, and are therefore referred to as off-balance sheet financing (OBSF). Portfolio buy-out, the partnership model and securitization are some examples of OBSF. These methods:
- Allow MFIs to package and sell their loan portfolios, reducing dependence on existing investors and helping them secure fresh funding to offer more loans;
- Reduce MFI credit risk and help reduce debt, thereby improving asset quality;
- Help banks profit from the premium received on sale of such assets;
- Allow corporations to enter the microfinance market by purchasing portfolio;
- Free up regulatory capital for MFIs.
OBSF allows an MFI to borrow, but in the process, can mask the level of indebtedness and obscure related ratios such as leverage. Hence, it is important to note that any form of non-disclosure slows the development of a viable market for this type of security.
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