The purpose of the proposed partnership between IFMR Trust and Masuta is to put in place a lending and operating structure that will sharply reduce the cost of funding for the producers of tasar.
The pilot phase will constitute funding for 13 MBTs (Mutual Benefit Trust) having approximately 300 women producers within a pocket in Jharkhand state.
The total funding requirements in the pilot phase is estimated to be Rs.75 lakh, which includes Rs.40 lakh for cocoon purchasing by producers and Rs.35 lakh for working capital requirement of MPCL (Masuta Producers' Company Limited).
The entire financing amount of Rs.75 lakh will be made directly to women producers of MBT. The women members (each “Client”) will be enrolled so as to capture detailed information like name, address, occupation, purpose of loan, amount of loan sanctioned and total amount produced. The system will also record movement of cash and inventory on a periodic basis. The cost of enrollment will have to be included in the total cost of providing the loans.
Structure of the Loan: IFMR Trust will structure the loan as a “commodity backed financing product” under which:
a. The cocoons will be stored in warehouses managed by Masuta (the “Commodity”).
b. Warehouse receipts will be issued by Masuta which certify the quantity and quality of the Commodity being held (the “Collateral” will consist of the specific Warehouse Receipt and the Commodity underlying such Warehouse Receipt)
c. The loan will be extended to each woman MBT producer and is secured by the respective Collateral1 (the “Warehouse Receipt backed Loan”)
d. As the Loans are made for the purpose of direct agriculture2 and fit the necessary criteria, they should benefit from cheaper interest rates available for “direct agriculture priority sector” eligible assets.
e. The warehousing of raw material and work in progress will be managed by Masuta.
-- Masuta will provide a guarantee on the quality, quantity and storage of the Collateral to the lender
f. Masuta will provide the administrative services related to the loan such as disbursements, documentation, data collection, information systems, collections and collateral management
g. The Loans will be pooled into portfolios (the “Warehouse Receipt Loan Portfolio”) and purchased by the IFMR Trust Guarantee Company at a mutually agreed price, provided the origination process meets the underwriting guidelines for warehouse receipt backed loans
Capital structure:
- Masuta will provide the equity contribution which finances the construction and operation of the warehouses. Masuta already owns the existing warehouses, however, additional warehouses will likely be required in the expansion of this programme after the pilot.
- Masuta will fund the first loss pieces (expected to be in the region of 10 to15 %) of the Warehouse Receipt Loan Portfolio.
- Debt financing will be provided via purchase of warehouse receipt backed loan portfolios that fulfill IFMR Trust Guarantee Company’s underwriting guidelines. These guidelines will be developed jointly with Masuta and in keeping with industry standards.
7. The detailed terms and conditions for the Warehouse Receipt backed Loan such as pooling of assets, lending processes and repackaging of the Warehouse Receipt Loan Portfolio into securities will be worked out by IFMR Trust.
Current Financing Structure:
Repayment Undertaking:
a. The member MBTs assess their annual requirements of cocoons well ahead of its harvest and inform Masuta.
b. The microfinance branch within Masuta takes loans from banks and other institutions and does bulk procurement of raw materials i.e. tasar cocoons. Masuta purchases cocoons on behalf of the MBTs making full payment on their behalf and providing the supply of the tasar cocoons to each MBT.
c. The loans are generally 6 month to 24 months in duration and are unsecured.
d. In Masuta’s books, the price of cocoons is advanced to the MBT's account.
e. Yarn is produced by producers from cocoon and sold to Masuta. Masuta makes payment to producers.
f. Principal plus interest amount of loan is reduced from final payment and balance amount is paid to producers by Masuta. Masuta takes 'undertaking' from MBTs for it.
g. Masuta pays principal plus interest amount to bank.
h. There is no separate corporate loan for Masuta's own working capital requirement currently.
Proposed Financing Structure:
i. IFMR Trust will extend the Rs.75 lakh loan directly to the 13 MBTs for cocoon purchasing and working capital requirements of Masuta3. The use of proceeds will be as follows:
a. Rs.40 lakh for cocoon purchasing by producer members of each MBT. This loan will be secured by the Commodity and the Warehouse Receipt (the “Warehouse Receipt backed Loan”)
b. Rs.35 lakh to be on lent to Masuta by MBT for its working capital requirements. This loan will be secured by the yarn inventory and receivables from end buyers of tasar silk yarn (the “Working Capital Loan”).
ii. Repayment of the loan
1. The Warehouse Receipt backed Loan will be repaid via sale proceeds of silk yarn from Masuta to the MBT.
2. The Working Capital Loan will be repaid via the sale of silk yarn by Masuta to the end buyer.
3. MBT will outsource raw material(cocoon) procurement process to Masuta.
d. Masuta will provide 'guarantee' on the entire loan amount given to MBTs.
Benefits for Masuta:
a. Steady availability of working capital financing will enable Masuta and the producer’s cooperatives to scale up its operations via long term financial planning
b. Reduction in the cost of funding by
o risk pooling
o structuring loans that are eligible as “direct agriculture priority sector assets”
c. Streamlining of processes and operations will reduce variable costs and mitigate operational risk
d. Diversification in sources of funding to mainstream capital markets investors
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