Securitisation volumes to remain strong in the near term, says ICRA

Non-banking finance companies (NBFCs) and housing finance companies (HFCs) together raised much needed funding to the tune of Rs. 2.36 lakh crore over the last 12-month period (October 2018 to September 2019) through sell down of their loan assets under either the securitisation or direct assignment route, according to credit rating agency ICRA.

This unprecedented increase in sell down volumes, which comes in the backdrop of the squeeze in liquidity since September 2018, reflects the choking up of traditional on-balance sheet borrowing channels such as loans, bonds and commercial paper issuances.

As per ICRA, the domestic securitisation market is expected to remain robust and FY2020 is poised to be another good year in terms of issuance volumes.

Abhishek Dafria, Vice President and Head – Structured Finance Ratings, ICRA, “NBFCs and HFCs continue to rely heavily on securitisation as a tool for raising funds, manage liquidity and to correct any ALM (asset liability management) mismatch. In addition to this, the partial credit guarantee scheme (PCG) of the Government of India (GoI) will also add bulk to the overall market volumes."

Securitisation volumes to touch an all-time high

With the public sector banks directed to disburse funding of Rs. 1 lakh crore under the PCG scheme by February 2020, ICRA has estimated that the size of the securitisation market would be at an all-time high, in excess of Rs. 2 lakh crore for FY2020.

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

As per ICRA estimates, the PTC transaction volumes were around Rs. 92,000 crore in the past one year, -- October 2018 to September 2019, (Rs. 47,500 crore in H2 (October 2018 - March 2019) of FY2019 and Rs. 44,500 crore in H1 (April-September 2019) of FY2020). Volumes for D.A transactions have been much higher at Rs. 1,45,850 crore over the same period (Rs. 87,450 crore in H2 FY2019 and Rs. 58,400 crore in H1 FY2020).

Mortgage loans share declines in D.A transactions

The agency said D.A volumes have witnessed a decline in H1 FY2020 mainly due to the weakened credit profile of a few originators (that were traditionally large and active participants) having impacted their ability to securitise further.

Consequently, the share of mortgage loans in overall volumes has also reduced. This asset class, which accounted for around 45% - 50% of overall volumes in FY2018 and FY2019, witnessed a reduction in share to 30% of overall volumes in H1 FY2020.

Within PTCs, while commercial vehicle loans remained most sought after, small business loans making up 11% of the PTC volumes in H1 FY2020. Within D.A’s, gold loan is an asset class that has gained greater acceptance amongst the purchasing banks and accounted for 10% of the D.A volume for H1 FY2020.

ICRA has observed that there has been a reduction in PSL (priority sector lending)-driven transactions in the PTC space. The share of PSL PTC transactions has slowly reduced over the past 3-4 fiscals and stood at 52% for H1 FY2020 compared to 88% in FY2017. This reduction can be majorly attributed to a change in the investor base in PTC transactions.

Private banks were the major investor category for PTC transactions and their need for acquiring PSL assets drove their appetite. However, in recent years a host of new investor segments such as NBFCs, foreign portfolio investors, HNIs and insurance companies have also been participating, who do not have any specific focus on PSL assets.

As a result, there has also been an increase in the proportion of non-PSL asset segments such as two wheeler loans, small business loans and gold loans amongst others, being securitised, ICRA said.

ICRA expects securitisation volumes to remain strong in the near term driven by the funding requirement for the NBFCs that are not being fully met through the other channels. The PCG scheme of the GoI will also help propel volumes in coming months.

The market can also benefit from implementation of recommendations made by the committee on the development of housing finance securitisation market formed by the RBI.

Dafria said: "In the long term, PSL volumes may be hampered as the banks may meet higher proportion of their PSL targets through the PSLC (Priority Sector Lending Certificate) route or through partnership with NBFCs – either through business correspondent (BC) model or through the loan co-origination framework permitted by the RBI recently (where banks may partner with NBFCs for onboarding PSL assets."

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