Domestic securitisation market volumes touched an all-time high of ₹1.99-lakh crore in FY2019, up 140 per cent, over ₹84,000 crore in the previous year, according to credit rating agency ICRA.

The market turned particularly buoyant in H2 FY2019, driven by the liquidity crisis, which forced non-banking finance companies (NBFCs) and housing finance companies (HFCs) to rely heavily on portfolio loan sell-downs to raise funds.

Vibhor Mittal, Group Head – Structured Finance Ratings at ICRA, said: “The securitisation market was particularly buoyant in H2 FY2019. On-balance sheet funding avenues were limited during this period, especially for low-rated entities. “The relaxation in the minimum holding period criteria for long-tenure loans by the Reserve Bank of India also helped, as it increased the supply of assets in the system.”

The securitisation market in India can be segregated into two types of transactions – rated Pass Through Certificate (PTC) transactions, and unrated Direct Assignment (DA) transactions (bilateral assignment of pool of retail loans from one entity to another).

DA transactions 

As per ICRA estimates, the total volumes for DA transactions in FY19 surged to ₹1.28-lakh crore (₹49,000 crore in FY18). DA transactions got a boost because some large HFCs undertook massive portfolio sell-downs in the second half (October 2018 to March 2019) of FY19 to raise funds for repayment of their capital market borrowings (mainly commercial paper).

Nearly 66 per cent of the DA volumes (₹84,000 crore) were undertaken by HFCs, of which, around ₹38,000 crore happened in Q3 (October-December) of FY19 alone.

Similarly, PTC volumes also more than doubled to ₹71,000 crore in FY19 (₹35,000 crore in FY18). The increase in PTC volumes was despite the average yields on such instruments being higher than usual by 100-500 basis points in the second half of the fiscal.

“Conventional asset classes such as mortgage loans (both housing loans and loans against property), vehicle loans, and micro loans continued to dominate overall volumes, with estimated share of around 86 per cent of the overall market. “Lease rentals emerged as a new asset class in FY19, and share of non-conventional asset classes such as term loans, gold loans, two- and three-wheeler loans, education loans, and consumer durable loans continued to rise,” said Mittal.

Fiscal 2019 also witnessed some innovative transactions being executed – the country’s first covered bond issuance and replenishing securitisation structure involving vehicle loans as the underlying.

Traditionally, in India, priority sector lending (PSL) requirement of banks has been the primary driver for securitisation volumes. However, in recent years, there has been greater participation by mutual funds, NBFCs, and even FPI investors to some extent, resulting in increased share of non-PSL transactions in the market. 

Non-PSL transactions

In FY19, the share of non-PSL transactions is estimated at around 38 per cent, much higher than in the previous years, said ICRA. Investments in Priority Sector Lending Certificates (PSLCs) is an alternative tool available to banks for meeting PSL requirements. 

The agency said PSLCs have gained widespread acceptance in the market, with traded volumes of around ₹3.3-lakh crore during FY19, against ₹1.84-lakh crore in FY18.

Volumes to moderate 

However, ICRA expects securitisation volumes to moderate in FY2020, compared to FY2019, as the quantum of assets eligible for securitisation have come down in the system, given the higher-than-usual volumes seen in FY 2019; and the incentive for higher-rated entities to undertake securitisation has reduced, given that the liquidity position has improved, and the on-balance sheet borrowing costs have come down in recent months.

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Published on May 8, 2019