Securitisation market expected to remain tepid in first half of FY21: ICRA

The securitisation market is expected to remain tepid in the first half (H1) of FY21 due to the uncertainties emerging from the Covid-19 pandemic and economic slowdown, according to credit rating agency ICRA. It added that moratorium extension announced by the Reserve Bank of India (RBI) will hurt the volumes in H1.

The agency said there will investor wariness towards securitisation in the near term due to uncertainty on borrowers’ payment behaviour post moratorium, and concerns emerging on servicing ability of originators, given the difficulties observed in changing the servicer.

In this regard, it also referred to the tendency to hold on to higher cash balances by investors (especially Non-Banking Finance Companies, non-Priority Sector Lending investors) and illiquidity of Pass Through Certificates (PTCs).

Income generation

ICRA opined that due to the ongoing nationwide lockdown that has severely impacted the income generation of a large number of borrowers, non-banking financial companies (NBFCs) are likely to witness a spike in delinquencies across all asset classes, especially loans disbursed by micro finance institutions (MFIs), which could result in challenges in sell-down of their portfolio.

However, as the lockdown situation eases and the economy starts to gradually recover, the securitisation market will again emerge as an important source of funding for NBFCs and Housing Finance Companies (HFCs) in the long run, the agency said.

The sell-down market in India is largely segregated into two types of transactions – Pass Through Certificate (PTC) transactions (loans are sold to a Special Purpose Vehicle which issues PTCs) and Direct Assignment (DA) transactions (bilateral assignment of pool of retail loans from one entity to another).

Securitisation involves transactions where credit risk in assets are redistributed by repackaging them into tradeable securities with different risk profiles, which may give investors of various classes access to exposures that they otherwise will be unable to access directly.

Abhishek Dafria, Vice-President and Sector Head - Structured Finance, said: “The funding requirements for NBFCs and HFCs is expected to be lower as the focus of lenders is likely to be on collections rather than fresh disbursements during H1 FY21.

“Consequently, retail loan growth is projected to be lower with lesser loans qualifying due to negligible fresh disbursements in H1 FY21 even as old/existing loans will continue to be under moratorium.”

ICRA said the total securitisation market remained buoyant in FY20, with the volume at₹1,96,700 crore against ₹1,98,700 crore in FY19. Volumes could have been higher by about ₹20,000 crore, but for disruptions on account of the Covid-19 pandemic, which made the investors cautious, said Dafria.

The speed with which normal economic activity resumes will be important to restore confidence of the investors in the securitisation market, he added.

As per ICRA estimates, of the overall Indian securitisation market volumes, PTC transaction volumes were around ₹77,000 crore and DA (direct assignment) transaction volumes were ₹1,20,000 crore in FY20 against ₹71,000 crore and ₹1,28,000 crore in FY19, respectively.

DA transactions continue to have a higher proportion in sell-down market as public sector banks, which form the largest investor segment, prefer DAs over PTCs.

In terms of share of priority sector lending (PSL) and Non-PSL transactions, a sustained increase in interest towards non-PSL assets was observed in FY20 when compared to FY19.

ICRA said the share of non-PSL assets increased to around 43 per cent in FY20 from around 38 per cent in FY19. The corresponding PSL assets share dipped to 57 per cent from about 62 per cent.

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