‘Domestic securitisation volumes expected to witness healthy bounce back in FY22’

Domestic securitisation volumes, consisting mainly of retail pools originated by non-banking financial companies (NBFC) and housing finance companies (HFC), are expected to witness a healthy bounce back in FY22 after witnessing a sharp contraction in the current year so far, according to ICRA.

The increase in the securitisation volumes for the remainder of the year (FY21) as well as FY22 would be supported by key drivers – mainly growing investor confidence in asset quality due to improving collections; higher funding requirement of originators on account of increasing disbursements; and improving business activities post the end of lockdown and moratorium period, the credit rating agency said.

Abhishek Dafria, Vice-President and Group Head - Structured Finance Ratings, ICRA, observed that collections across all asset classes have bounced back sharply since the dip seen in April 2020 following the nationwide lockdown.

“The resumption of businesses, as the lockdown has gradually eased, has supported the ability of the retail borrowers to meet their EMI payments. This has reduced investor wariness towards purchase of retail pools that has led to a healthy momentum in fresh securitisation from September 2020 onwards,” he said.

Financing requirements

According to Dafria, the financing requirements for NBFCs and HFCs are also expected to increase in FY22, as disbursements would be closer to the pre-Covid levels, which, in turn, would support securitisation market as a tool to diversify funding sources.

Appetite for securitisation of unsecured loans though still remains relatively weak, and would only improve if the collection efficiency for such asset classes continues to increase in a sustainable manner, he added.

Securitisation market volume had slumped to ₹22,700 crore in the first half (H1) of FY21 from about ₹1 lakh crore in the year-ago period, as per ICRA’s note in October 2020.

Domestic securitisation volumes, which had seen a sharp drop in Q1 (April-June) FY21, more than doubled in Q2 (July-September) FY21 from about ₹7,500 crore to about ₹15,200 crore, with the improvement in volumes being supported by both reduced investor wariness as well as increase in disbursements by NBFCs, thereby leading to higher financing needs, the agency then said.

In ICRA’s view, the credit quality of the rated pass-through certificates (PTCs) should remain ‘stable’ during FY22.

The agency opined that even though the collections may not have reached the pre-Covid levels, the credit enhancement available in the transactions has further built-up owing to the amortisation of the pools supporting their credit quality.

The ratings agency has downgraded ratings of 10 PTCs in FY21 so far compared to 31 upgrades.

The rating downgrades have occurred largely on account of absence of moratorium provided by the investor on the PTC payouts, leading to high utilisation of credit enhancement during period of April to August 2020; and originator-specific concerns such that the credit quality of the originator itself has significantly weakened.

Dafria said: “Collection efficiency across asset classes are expected to further improve and remain robust in FY22, notwithstanding any prolonged period of economic slowdown that could have a bearing on the ability of the borrowers to sustain their EMI repayments.”

As of November 2020 payout, ICRA has observed only 4 per cent of its rated transactions, where more than 10 per cent of the credit collateral has been utilised.

Given the sequential improvement in collections post the moratorium, the possibility of material utilisation of credit collateral in future remains low, Dafria said.

“The current collection efficiency of most of ICRA-rated pools is well above the breakeven collection efficiency required to meet the investor payouts.

“We thus expect limited negative rating actions in this sector in the near term,” he added.

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