Microfinance Risk Participation and Guarantee Program

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.

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.

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.

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.