STRUCTURED FINANCE

One of our clients, an analyst at an investment management firm, would like to speak with a
Council Member who is knowledgeable about Structured Finance. More specifically, they
would like to discuss the following questions:

1. Market sizing of the structured finance market (securitisation , PTC, guarantees, etc) with
specific focus on the segments of Microfinance, vehicle finance, agri loans, etc . Outlook for
the industry
2. Key players in the industry and how do the economics for syndication players work
3. Key challenges for growth of the market

In your response, please indicate which of the above topics (1-3) you are able to discuss,
and comment on your relevant knowledge/experience.

Council Members are not allowed to discuss any details about their current employer or any
information considered confidential or proprietary to a third party in a GLG consultation.

We need a little more information to ensure your expertise is the exact right match for our
client. Please answer a few brief qualifying questions.

STRUCTURED FINANCE

One of our clients, an analyst at an investment management firm, would like to speak with a
Council Member who is knowledgeable about Structured Finance. More specifically, they
would like to discuss the following questions:

1. Market sizing of the structured finance market (securitisation , PTC, guarantees, etc) with
specific focus on the segments of Microfinance, vehicle finance, agri loans, etc . Outlook for
the industry
2. Key players in the industry and how do the economics for syndication players work
3. Key challenges for growth of the market

In your response, please indicate which of the above topics (1-3) you are able to discuss,
and comment on your relevant knowledge/experience.

Council Members are not allowed to discuss any details about their current employer or any
information considered confidential or proprietary to a third party in a GLG consultation.

We need a little more information to ensure your expertise is the exact right match for our
client. Please answer a few brief qualifying questions.
Are you able to discuss the market sizing of the structured finance market (securitisation ,
PTC, guarantees, etc) with specific focus on the segments of Microfinance, vehicle finance,
agri loans, etc.? Outlook for the industry
Yes

No

Not allowed to discuss

Please provide a comment.

I have worked across various segments from Corporate Banking to Mid Corporate and SME
Lending to Capital Market Lending. This has enable me to have a decent network in the
industry and have gained satisfactory understanding from my network with regards to the
structured finance market.

Are you able to discuss the key players in the industry and how do the economics for
syndication players work?

Have been involved in the syndicated transactions in my corporate banking stint with fair
idea of players.

Are you able to discuss the key challenges for growth of the market?
Exposure to such tools in structured finance is low in the market which is backed by certain
inherent market dynamics leading to such challenges in the market.

Securitisation just got costly

Banks must provide 100% deduction of credit enhancement from capital.

Securitisation of loan assets today got more expensive for banks with the Reserve Bank
of India (RBI) stipulating a stiff 100 per cent deduction from capital the amount of credit
enhancement provided.

Credit enhancement is the support provided, including through cash collaterals, so that
the credit rating of a pool of assets securitised gets enhanced.
Securitisation is a process by which banks and non-banking finance companies (NBFCs)
sell loan assets to a special purpose vehicle (SPV) in return for an immediate cash
payment.

In the second stage, the security interests representing claims on incoming cash flows
from the pool of assets are repackaged and sold to third party investors by issuance of
tradable debt securities.

RBI, in its final guidelines on securitisation of standard assets, has brought in two levels
of credit enhancements (first loss and second loss facilities), requiring banks to do away
with the current practice of just a single credit enhancement facility.

RBI said banks, financial institutions and NBFCs originating securitisation of assets have
to deduct 50 per cent each of first loss facility and second loss facility from Tier 1 capital
and another 50 per cent each from Tier 2 capital.

RBI has capped the first loss facility at the amount of capital that the bank would have
been required to hold for the full value of assets, had they not been securities.

The treatment of credit enhancement provided by a third party (other than the originator)
is a little less harsher. The first loss credit enhancement provided by third party service
providers will be reduced from capital to the full extent, but just prescribed a 100 per cent
risk weight for the amount of the second loss credit facility.

Bankers said the 100 per cent deduction from capital for the second loss credit
enhancement provided was unwarranted as it would get activated only after the first loss
facility gets consumed.

The first loss facility is provided to ensure the pool of assets securitised get the bare
minimum investment grade rating and the second loss facility is an additional cushion for
obtaining a higher rating.

Banks till hitherto applied the normal capital adequacy norm considering a 100 per cent
risk weight for the amount of credit enhancement provided.

Securitisation issues had totalled Rs 22,300 crore in 2004-05, 176 per cent higher than
in the previous year. Credit enhancement provided ranges from 5 per cent to 10 per cent
of the issue sizes.

The new capital treatment will mean banks have to deduct from capital the 100 per cent
of the credit enhancement, against 9 per cent capital adequacy (Rs 9 for every Rs 100
of credit enhancement) cover provided now.

RBI also said the liquidity facility provided should be to smoothen temporary cash flow
mismatches and will remain drawn only for short periods.

If the drawings under the facility are outstanding for more than 90 days, it should be
classified as a non-performing asset (NPA) and fully provided for.

The commitment to provide liquidity facility, to the extent not drawn would be an off-
balance sheet item and attract 100 per cent credit conversion factor as well as 100 per
cent risk weight for capital adequacy purposes.
RBI said when the originator is providing the liquidity facility, an independent third party,
other than the originator's group entities, should co-provide at least 25 per cent of the
liquidity facility that shall be drawn and repaid on a pro-rata basis.

The originator must not be liable to meet any shortfall in liquidity support provided by the
independent party.

RBI said the sale of assets through securitisation should result in immediate legal
separation of the originator from the assets which are sold to the new owner, viz.
the SPV.

The assets should stand completely isolated from the originator, after its transfer to the
SPV, i.e., put beyond the originator's as well as their creditors' reach, even in the event
of bankruptcy of the originator.

Structured Finance

IFMR Capital achieves its mission of connecting high quality originators in financially excluded
sectors and financially excluded households with debt capital markets through:

i) catalysing debt capital markets and enabling market making,

ii) using financial structuring expertise for designing innovative, client-driven products
iii) maintaining strong standards on underwriting and expert risk management

Participation in IFMR Capital-led transactions and availing financing via IFMR Capital’s
products helps our partner institutions diversify sources of funding, build reputation and
credibility in capital markets, achieve lower cost of financing and in some cases enable capital
release.

To maintain aligned objectives, IFMR Capital always retains its skin in the game by not only
structuring and developing products, but also by investing in them or participating in the deal
as a co-guarantor or credit-enhancer.

Our product suite spans the continuum of plain vanilla on balance sheet products and complex
structured finance products. Provided below are the list of products IFMR Capital has
developed over time and offers through its own balance sheet or structures and invests in as
the case may be :

Term Loan & Cash Credit:

IFMR Capital offers through its own balance sheet, term loans to partner institutions. The
tenor of the loans is matched to the asset-liability balance of the client. This product has
seen a surge in off-take year on year owing to the fast turn-around time and organized
process. Similarly, the cash credit product is offered to clients who have vintage and have
demonstrated sound asset-liability management capability.

RATED SECURITIZATION:
Rated securitization is one of IFMR Capital’s most popular structured products, for large and
small originators alike. In addition to structuring and arranging a securitization transaction,
IFMR Capital retains skin in the game by routinely investing in subordinated tranches of the
securitization deal and has in certain cases picked up stake in senior tranches in addition to
the subordinated tranche.

As part of structuring the deal, IFMR Capital cherry-picks loans through defined criteria from
unencumbered portfolios of originators for sale to a Special Purpose Vehicle (SPV). The
SPV is a private trust set up as a bankruptcy-remote entity. A rating agency evaluates the
structure and underlying pool of loans to assign ratings to the tranches in the deal. To
achieve the desired rating, credit enhancement is provided by the originator in the form of a
first loss facility, over-collateralization or cash collateral. IFMR Capital and other investors
may also provide second loss support either by way of investment in subordinated tranches
or by way of a second loss facility.

The SPV then issues debt securities in the form of pass through certificates, for which
investors are arranged by IFMR Capital.

IFMR Capital structures, arranges and invests in both single originator and multi-originator
securitization (Mosec) deals. Over the years, IFMR Capital has spun out a large range of
cost-effective structures for securitization.

BILATERAL ASSIGNMENT:
Bilateral assignment is one of IFMR Capital’s long standing product offerings and involves a
sale of portfolio from the Originator or seller to the assignee or buyer. IFMR Capital as a
structurer and arranger, hand-picks loans from the Originator portfolio that can be bought by
the assignee, identifies assignee investors, and facilitates deal execution.

In many cases, IFMR Capital participates in the deal via a risk participation facility to ensure
alignment of incentives.

GUARANTEE BASED LENDING:

In a first of its kind lending programme, IFMR Capital partnered with the Asian Development
Bank (ADB) in 2012 to enable partial-guarantee backed lending to Indian microfinance
institutions (MFIs). Under this programme a domestic banking partner extends rupee loans
to MFIs in India backed by the partial-guarantees from ADB and IFMR Capital.

Under the programme framework, IFMR Capital recommends eligible MFIs to ADB and the
domestic banking partner using its own internal due diligence standards and also provides
subsequent portfolio monitoring and surveillance support. As a co-guarantor under the
facility, IFMR Capital’s incentives are aligned with that of ADB and the banking partner in
ensuring the long-term success and sustainability of the programme.

NON-CONVERTIBLE DEBENTURE:
IFMR Capital also arranges for investment in the non-convertible debenture (NCD)
issuances of its partner institutions. IFMR Capital has thus far arranged for a wide variety of
NCD issuances of different sizes and tenor. Investors in the NCD issuances of IFMR
Capital’s partners include Foreign Portfolio Investors and Mutual Fund houses. IFMR Capital
has arranged for both secured and unsecured senior NCDs and unsecured subordinated
long-term NCDs.

COMMERTIAL PAPER:
In an effort to provide a wide-ranging product suite to its clients, spanning different tenors,
IFMR Capital also arranges for investment in the commercial paper issuances of its partner
institutions. Key investors in the commercial paper issuances arranged by IFMR Capital are
Alternative Investment Funds (AIFs), NBFCs and large Mutual Fund houses.

EXTERNAL COMMERCIAL BORROWING:

In FY 2015, IFMR Capital also concluded the placement of its first External Commercial
Borrowing deal unlocking a total financing of INR 630 million. IFMR Capital continues to be a
key participant in the ECB arrangement space with deals being concluded for a wide range
of partner institutions. Through this route, IFMR Capital also manages to unlock
subordinated debt capital in addition to senior debt.

COLLATERALIZED POOLED-BOND PROGRAMME:

IFMR Capital ended FY 2014 with the successful placement of CBO I – which was the first
Collateralized Bond Obligation programme, structured, arranged and co-guaranteed by
IFMR Capital. CBO I was concluded in March 2014 with an issuance size of INR 980 million
and participation from eleven first-time issuers of non-convertible debentures. The structure,
though complex to execute, has seen significant scale over the year under review and
represents significant market-making for IFMR Capital’s clients. Banks, large NBFCs and
Mutual Fund houses are key investors in the collateralized pooled-bond programme. In
addition to medium and larger sized issuers, the programme finds favour with a sizeable
proportion of smaller-sized originators who issue NCDs for the first time under this
programme.

TIER II INSTRUMENTS:
IFMR Capital unlocks significant value to partner institutions by arranging for subordinated
debt capital through long-term unsecured NCDs and via the placement of preference shares.
Investors in this segment have been FPIs and AIFs.

DEBT SYNDICATION:
In addition to products that IFMR Capital structures, arranges and invests in, IFMR Capital
operates an active syndication desk that performs pure-play debt syndication for partner
institutions from large domestic, public and private sector banks and NBFCs.