Money & Banking

Covid Omicron threat: Investors may turn cautious when purchasing retail loan pools from NBFCs, says ICRA

Our Bureau | | Updated on: Dec 06, 2021
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Ratings agency says securitisation volumes in FY23 could also be affected

The threat of the newly discovered Omicron variant of Covid-19 may once again make investors cautious when purchasing retail loan pools originated by non-banking financial companies (NBFCs) and housing finance companies (HFCs) through direct assignments and securitisation transactions, according to ICRA.

The credit rating agency said the spread of the virus could reignite worries on Statewide or nationwide lockdowns which would have a bearing on the loan collection abilities of the NBFCs and HFCs.

The agency noted that in the event that the Omicron variant does disrupt business activities and results in even temporary lockdowns, securitisation volumes could be severely affected for the rest of the year.

In such a scenario, ICRA opined that investors would prefer to wait for the threat to subside and NBFCs and HFCs may again reduce their disbursements as had been seen during the previous periods of lockdowns.

Unsecured financiers may be worst affected

Abhishek Dafria, Vice President and Head - Structured Finance Ratings, ICRA, observed that if the worry around the Omicron variant grows, the unsecured loan financiers would be worst affected in the securitisation market as the borrowers have a higher probability of missing loan repayment for an unsecured loan during periods of economic stress.

Such financiers would find it difficult to find investors for their securitised pools or else would have to offer higher credit enhancements which would increase the cost of doing the transaction, he added.

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“We believe the securitisation market would continue to favour secured asset class over the near term until the threat of Covid infections reduces substantially.

“For the existing transactions rated by ICRA, the credit enhancements are expected to be more than adequate to meet any shortfalls to the investors during temporary periods of stress as has been evident for the past 18-20 months,” Dafria said.

During the Covid period, securitisation of secured asset classes, such as mortgage-backed loans, vehicle loans, gold loans etc., have been preferred over unsecured asset classes such as microfinance or SME loans.

Securitisation volume about 40% pre-Covid level

ICRA had earlier estimated the securitisation volumes (including direct assignments) to be about ₹1.2-lakh crore for FY22 (i.e. year-on-year growth of 30-40 per cent) with about 60-70 per cent of volumes being generated in the second half (H2) of the fiscal.

For H1 FY22, securitisation volumes stood at ₹42,800 crore compared to ₹22,700 crore in H1 FY21.

The agency assessed that securitisation volumes in FY23 could also be affected by lower disbursements as the availability of retail loans for securitisation would also decline.

Dafria noted that while securitisation volumes had seen a healthy improvement in the current year so far as compared to the previous year, the volumes are still only about 40 per cent of the pre-Covid period.

“The rise in Covid-19 infections during April and May 2021 depressed the securitisation volumes for a while.

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“The threat of spread of Omicron variant is again a sign of worry. These are still early days to assess its impact and we hope that the vaccinations are effective against the new variant too,” he said.

Nonetheless, some State governments may choose to take early precautions and reintroduce measures adopted in the past, such as localised lockdowns or night curfew, which would also result in negative sentiments as far as securitisation is concerned.

Collections bounce back

ICRA also observed that collections have bounced back quicker in the secured asset classes compared to unsecured asset classes. For H1 FY22, almost 85 per cent of securitisation volumes constituted of secured loans.

Published on December 06, 2021

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