How securitisation can solve for working capital needs of MSMEs

The securitisation market in India has evolved over the years. In the last two decades, we have seen substantial participation from commercial vehicles, micro-finance, and retail asset pools. Debt securitisation works as an instrument for refinancing banks and their portfolio risk management.

Although securitisation volumes have reached around Rs 1.5 lakh crore, participation has been limited to banks and larger blue-chip companies. If focused, it can also be a viable funding alternative for micro, small, and medium enterprises (MSMEs). Though formal lending remains critical for small enterprises, there is a growing concern that credit restrictions have become the new normal.

Hence, it is important to expand the range of financing instruments available to MSMEs to enable them to continue playing their role in investment, growth, innovation, and employment in the economy. It is predicted that Indian MSMEs' lending potential can exceed $3 trillion by FY23-24.

A means of doing that is Trade Receivables Securitisation (TRS), which is prevalent abroad and growing rapidly in this new age of finance and technology convergence. 

How does TRS work?

In simple terms, TRS entails selling a company’s outstanding invoices/receivables to a “purchaser,” typically a Special Purpose Vehicle (SPV). The SPV pools all assets (backed by these receivables) and issues debt instruments called pass-through certificates (PTCs). The investors subscribe to these PTCs, opening up new company funding avenues. The process allows the company to convert its outstanding dues into cash, which can be used to finance its operating cycles or invest in growth opportunities.

Key benefits of securitisation

Credit risk mitigation: By selling its account receivables, the company transfers the credit risk associated with these receivables to the purchaser/investors. On the other hand, the investors manage these risks through credit enhancement, etc., and hence, are willing to commit larger sums to a securitised asset than a traditional revolving credit facility.

Improved liquidity: Securitisation can increase the total liquidity of the firm and diversify its funding sources. It is a form of non-recourse financing, compatible with all other forms of debt and can enhance the enterprise value of the organisation.

Pricing benefits: Interest rates are market dependent and hence more transparent. Over a period of time, they can be cheaper alternatives to traditional funding sources like banks, NBFC, etc. 

Evolution in regulatory framework

Securitisation is often seen as a complex, specialist area of corporate finance. However, regulators are increasingly focusing on strengthening the securitisation process to unlock capital markets and channelling liquidity toward investment-starved companies across India.

On December 5, 2022, the Reserve Bank of India updated its 2021 guidelines to streamline the securitisation of standard assets, which was praised for giving more securitisation options. The guidelines dictate that loans with a residual maturity of fewer than 365 days are not allowed to be securitised. This has reduced the volume of tradable securities available in the market but the quality of securitisation has improved. In addition, the RBI lowered the minimum holding period (MHP) for mortgage loans that can be securitised.

However, securitisation norms are a bit favourable in the case of trade receivables as MHP is less onerous. This makes time-to-market for securitisation of receivables faster than others, allowing companies to receive cash due immediately even though the payment terms may be of 45 days or more. 

It is evident from the regulatory changes that the Indian government is keen to streamline the securitisation market in India. The intention is to provide a robust regulatory mechanism for an alternate fund-raising option for MSMEs. The focus of the government in supporting the MSME sector, which acts as the backbone of our economy, cannot be emphasised enough.

(Shantanu Bairagi is the Co-founder of Artfine , a specialist structuring firm focused on supply chain financing.)