Money & Banking

Pace of collection recovery, use of enhanced credit to determine credit quality of PTCs: ICRA

Our Bureau Mumbai | Updated on September 15, 2020 Published on September 15, 2020

Rating agency sees slippages in softer buckets increasing substantially post moratorium

Credit rating agency ICRA on Tuesday said the credit quality of the pass-through certificates (PTCs), rated by it, issued under securitisation transactions will remain sensitive to the pace of collection recovery and extent of credit enhancement utilisation post moratorium.

The agency expects the slippages in softer buckets (0 + days past due) to increase substantially for most transactions post the moratorium (October 2020 payout).

ICRA, in a note, observed that originators (of securitisation transactions) are expected to continue to focus, support and strengthen their collection efforts at a greater intensity over the next few months to restrict any substantial rise in slippages and delinquencies.

A securitisation transaction typically involves sale of a pool of loan receivables by a financier (originator) to a Special Purpose Vehicle (SPV, typically a trust) and issue of PTCs, which denote a beneficial right on the receivables, by the SPV to the investors.

Recovery in collections

Collections in the pools underlying ICRA-rated securitisation transactions, across asset classes, witnessed a steady recovery from May 2020 onwards, post a steep drop in April 2020 due to the Covid-19 pandemic-induced nationwide lockdown.

The agency noted that collections started to improve, led by gradual resumption of business activities following the easing in lockdown.

As per the note, the improvement in collection was also supported by almost all of the originators putting in efforts to accept and promote online collections. As a result, despite regional lockdowns and restrictions on movements, collections across segments have seen significant recovery during the April to July 2020 period.


Among the segments, ICRA assessed that collections in the mortgage-backed securities (MBS) segment continued to show remarkable resilience, witnessing substantial improvement over the past four-month period. Within MBS, affordable housing pools have shown marginally lower recovery in collections.

Within asset-backed securities (ABS), excluding microfinance, SME (small and medium enterprise) pools have shown higher collections as compared to vehicle pools, the agency said. Collections in microfinance pools, which had dipped to lower single digit in April 2020, recovered substantially by July 2020, it added.

Abhishek Dafria, Vice President and Group Head - Structured Finance Ratings, ICRA, said: “Basis discussions with originators, collections in August 2020 is believed to have seen further improvement relative to that in July 2020 but the pace of incremental improvement has slowed down.

“The collections continue to remain lower than the pre-Covid levels by 20 per cent to 40 per cent, depending on the originator and asset class.”

Collection efforts


felt that the collection efforts would, however, face a challenge from the weakening of the financial profile of the borrowers on account of weaker economic activity amid the Covid-19 pandemic, regional lockdowns and flood-like situation in certain geographies, which may not result in an immediate recovery to pre-Covid levels.

In line with the Reserve Bank of India’s ‘Covid-19 Regulatory Package’ (which was effective from March 1 to August 31, 2020), most originators offered moratorium to their borrowers and also received a similar approval from investors on PTC payouts.

ICRA said for most transactions, the utilisation of credit enhancement was suspended during the moratorium period. As a result, till August 2020 payouts, there have been very few transactions wherein cash collateral has been utilised on account of marginal collection shortfall to meet the promised payouts to investors.

Slippages into softer buckets


Upadhyay, Assistant Vice President, ICRA, said, “Post moratorium (that is during the October 2020 payout), ICRA expects the slippages into softer buckets (0+dpd) to increase substantially for most transactions.

“Also, the transactions with a timely interest and timely principal (TITP) structure where interest and principal are promised on monthly basis may see an increase in utilisation of the credit enhancement.”

Consequently, the extent of credit enhancement utilisation and the pace of recovery in collections would remain key monitorables in ICRA’s assessment of the credit quality of the transactions. Thus, the credit quality of PTCs, much like that of other debt instruments, is hugely dependent on the extent and speed of overall economic activity.

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Published on September 15, 2020
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