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Private Sector (Nonsovereign) Financing

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Microfinance Risk Participation and Guarantee Program

What is the program about?

For individuals, families, entrepreneurs and small businesses, access to finance is often cited as a primary obstacle in their path of self-employment and economic development. For the most part, this is the target market of microfinance institutions (MFIs). Across Asia and the Pacific, many MFIs struggle to obtain the commercial funding they need to grow and to meet the demands of their micro-borrowing clients, a vast majority of which are women.

ADB's Microfinance Risk Participation and Guarantee Program is a credit enhancement and a risk-allocation tool, designed to address a market gap and promote local currency lending to MFIs. ADB partners with micro-finance institutions, to increase their access to local currency funding and address the financial needs of millions of people, at the base of the pyramid across the region. Given its risk-sharing structure, the program encourages private sector participation on market-determined terms.

Program Highlights, 2010-2019

Microfinance Risk Participation
 

$1.18 billion

Total loans supported
 

$610.22 million

Cofinancing
 

6.12 million

Borrowers supported
 

35

MFIs approved
 

10

Partner financial institutions (PFIs)
 

Bangladesh, Cambodia, India, Indonesia, Myanmar, Philippines

Countries covered

Who can participate

The program is open to international and domestic financial institutions. General minimum criteria include:

  • Rating of BB or higher (or equivalent) from at least one international credit rating agency, or industry recognition as a key player in the microfinance sector
  • Reputable and sound ownership, management, and governance standards
  • Status as a duly registered, regulated, and licensed entity in ADB's developing member countries
  • Dedicated approach to the microfinance sector, including teams at both relationship manager as well as, risk management levels
  • Acceptable underwriting systems and servicing platforms in place
  • For banks, 3 years of experience in lending to MFIs; For nonbank financial institutions, at least 7 years of continuous operations and 5 years of experience in lending to MFIs in ADB’s developing member countries
  • For banks, nonperforming loans of less than 5%; For nonbank financial institutions, a loan portfolio of at least $250 million and nonperforming loans of less than 5%
  • Successful completion of applicable ADB due diligence and approval procedures

Partner financial institutions

International

  • Citibank NA
  • Standard Chartered Bank

India

  • IndusInd Bank
  • Kotak Mahindra Bank
  • Northern Arc Capital (formerly, IFMR Capital)
  • RBL Bank
  • Vivriti Capital
  • DBS Bank India

Myanmar

  • Malayan Banking Berhad

Sri Lanka

  • Hatton National Bank

Transactions Supported

Term Loans

The objective of the Microfinance Risk Participation Program is to cover payment default risk on loans made by PFIs to MFIs in ADB DMCs. ADB shares on a pro- rata basis the default risk of ADB-approved microfinance institutions up to 50%. It is designed to encourage PFIs to lend where there is a significant lack of access to finance for MFIs. Under the risk- sharing agreement, ADB would create additional headroom for PFIs to increase lending volumes under PFI country and individual MFI limits.

Term loans

Capital market instruments

Medium-sized MFIs are expected to access the capital markets to reduce their dependency on commercial borrowing, and most if not all will find it challenging to execute transactions, such as local currency bond issuances or securitizations, as a result of a lack of or low credit ratings. To address this, ADB offers partial credit guarantees on bonds issued by MFIs through a trustee and on securities to support MFI access to diversified funding in capital markets.

A. Bond Issuance
ADB offers partial credit guarantees on bonds issued by microfinance institutions through a trustee to support access to diversified funding in capital markets. ADB takes credit exposure on the microfinance institution issuing the bond and guarantees up to 50% of the principal bond amount. Bond issuances usually have a tenor of three to five years, and ADB’s credit enhancements would thus need to be able to cover this period.

Bond issuance

B. Securitization
For securitization where a pool of microfinance loans is sold without recourse to investors, ADB partially credit enhances the senior notes portion of the securitization structure held by an arranger or accredited partner financial institution. This option requires that ADB provides credit enhancement (senior second loss guarantee) on the portion of a specific microfinance institution loan portfolio.

Securitization

Other structures

A. Partner financial institution's microfinance (retail) portfolio
ADB guarantees or participates in the default risk of a PFI’s wholesale lending to a particular MFI and establishes a credit limit for each participating MFI. However, in some countries (e.g., India) loans of microfinance borrowers (which are often originated by MFIs used as agents) are pooled. Existing and potential new PFI and MFI program partners have requested that ADB guarantee or participate in these pooled microfinance loans. ADB will partially guarantee or risk participate in up to 50% of pooled microfinance loans on the balance sheet of a PFI, thus reducing the risk profile of those assets for the PFI and encouraging further lending to the sector. This portfolio guarantee and/or risk participation will be done on a pilot basis with existing accredited PFIs and is expected to be used initially in India.

B. Standalone Guarantees
For countries where ADB does not have an accredited PFI, it is proposed that a stand-alone partial guarantee and/or risk participation for approved MFIs be incorporated into the program so that MFIs could obtain a bank loan. ADB would share up to 50% of the default risk on a pari passu basis with the lending bank. In addition to sharing exposure with ADB, ADB’s guarantee will seek to crowd in private sector banks that otherwise might not consider lending to this asset class. ADB will apply specific eligibility criteria for these MFIs and adjust the due diligence process.

Client testimonials

Bob Annibale
Global Head of Inclusive Finance, Citibank

"Citi is pleased to collaborate with ADB to broaden financial inclusion in Asia through an innovative microfinance local currency partnership that will help many of Citi’s clients achieve their mission in unlocking the economic potential of underserved communities. We value and share ADB's deep commitment to supporting inclusive finance in Asia."

Daniel Hanna
Global Head, Public Sector and Development Organisation, Standard Chartered Bank

"Standard Chartered remains committed to the microfinance sector which plays a crucial role in financial inclusion in our franchise markets. The Risk Participation program with ADB since 2013 has helped to unlock additional funding to microfinance institutions at a time when the industry was re-emerging from a difficult economic cycle. We expect that the increased size of the program from $190 million to $240 million will extend additional credit flow to microfinance institutions across Asia thereby reaching more unbanked individuals and finance additional micro enterprises and livelihoods."

Dr. Kshama Fernandes
MD and CEO, Northern Arc Capital

"Northern Arc Capital joined hands with ADB in 2012 and pioneered the guarantee programme for microfinance in India. Over the last four years, this program has helped unlock mainstream financing for the microfinance sector in India. It has set many high quality microfinance institutions on their growth trajectory and helped them achieve scale. The program has had far-reaching impact evidenced in the enabling of access to finance to over 2.1 million underlying households. Northern Arc Capital greatly values the partnership with ADB."

Related Materials

Helping Finance Flow to Micro and Small Business Owners

ADB uses credit enhancement products to promote private sector financing for lending to micro and small business owners. In India, it works with banks to provide local currency financing to microfinance institutions.

Microfinance Brings Rural Women One Step Closer to Their Dreams

For many women like Sarvesh Chauha who live on the edge of poverty, having easy access to microfinance loans means they now have a way of securing a brighter future. #RuralWomen

Contacts

Anshukant TANEJA (Mr)Principal Investment SpecialistPrivate Sector Financial Institutions Division   E-mail
Melissa Jane ESCUREL (Ms)Associate Investment OfficerPrivate Sector Financial Institutions Division   E-mail
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