A microfinance lender securitises a loan pool through pass-through certificates. Size the credit enhancement from expected loss, split it between cash collateral and over-collateral, and name the risks specific to this asset class.

Enhancement is 3 x 4% = 12% of the pool, Rs 36 crore; one workable split is 5% over-collateral, Rs 15 crore, and 7% cash collateral, Rs 21 crore. The PTCs are then Rs 285 crore and untouched until pool losses exceed 12%. Microfinance pools add event risk: unsecured loans, geographic concentration, disasters, political interference in collections, and borrowers who hold loans from several lenders.

Think of a group of friends lending a small sum to one of them. They expect a little to go unpaid, so they keep a buffer; but they want to be safe even in a very bad year, so the buffer is a few times what they expect to lose. Credit enhancement is sized so the certificates survive a loss several times the expected one, and the multiple rises with the rating wanted. Here 4% expected loss times 3 is 12%, Rs 36 crore on a Rs 300 crore pool. A higher rating would need a bigger multiple, and a pool with more uncertain losses would need more even at the same rating.

The two forms behave differently. Over-collateralLoans placed in the pool beyond the value of the certificates issued, so the first losses fall on the originator’s extra loans. costs Ojasvara loans it could otherwise fund elsewhere; cash collateralA deposit, often a fixed deposit, set aside for investors and drawn to cover shortfalls in collections. costs it cash that earns a deposit rate while its loans earn far more. Cash is also more certain: the rupees are there on day one, while over-collateral is worth only what the extra loans collect. A common approach is a split such as 5% over-collateral and 7% cash, with the cash held non-amortising, so as the pool repays, the Rs 21 crore becomes a larger share: when the pool has halved to Rs 150 crore, the same deposit is 14% of it.

Name the risks that make a 4% expected loss unreliable. Microfinance losses are low in normal times and jump in events, so the tail, not the average, drives the rating. The loans are unsecured and rely on group pressure and regular field collection; anything that stops collections, a flood, a pandemic lockdown or a political call not to repay, can move losses from 2% to 20% in months. Pools are often concentrated in a few districts or states, so one event hits many loans. Borrowers may hold loans from several lenders, which hides over-indebtedness. The servicer collects cash from borrowers, so if Ojasvara itself is in trouble, collections and commingled cash are at risk. Say what you would ask for: geographic limits in the pool, a back-up servicer, and the originator's retained share. Retention and other securitisation rules should be confirmed against the current regulations rather than quoted from memory.