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MICROCREDIT in India

Via Rajesh Jain

FOR the poorest of India's poor, the securitisation of financial assets might seem arcane, remote and irrelevant. Yet a new approach to microcredit—the lending of tiny amounts of money to people with even tinier assets—is applying the technique to village life.

ICICI, an Indian bank, has just completed two such deals in the state of Andhra Pradesh. In the larger one, it has paid $4.3m for a portfolio of 42,500 loans from SHARE, a microfinancier. ICICI's Brahmanand Hegde concedes this differs from the more familiar process of securitising car-loans or home mortgages in a number of important ways.

First, SHARE will be responsible for collecting the loans. Nor will the securities be “asset-backed”, as is usually the case with car and house financing. The buffaloes, handcarts and other small-business wherewithals that the loans were spent on will remain unencumbered. ICICI will have as collateral instead a “first loss” guarantee of an 8% deposit of the total from the Grameen Foundation, an American charity devoted to propagating microcredit.

Third, there is, as yet, no secondary market for the securities, though ICICI is talking to Crisil, a credit-rating agency, about the prospects for its rating the paper, and is hoping that over time other banks will enter the market too.

SHARE's boss, Udaia Kumar, secures a new source of funds, off SHARE's balance sheet, at a cost that is three to four percentage points cheaper than it pays for a bank loan. This will help him meet his aim of increasing his number of borrowers from under 300,000 now to 1m, a target that will, he reckons, require $62.5m in new funds. He says that 99% of his clients have never tried to run a business before, and are uneducated and illiterate. Their children may have better luck.

Here are some additional details on SHARE.