Asset Securitization in India: Facts and Facets

“Securitization market volume in India jumped 31% YoY to INR 60,000 crore in Q2 (July-Sep 2024) FY25 taking the total volume to INR 1.04 lakh crore in H1FY25.” - ICRA

Asset Securitization is a process where debt products like home loans, auto loans, microfinance loans, and credit card debt are pooled and repackaged as interest-bearing securities. It basically works on the assumption that the probability of several assets defaulting is lower than the probability of defaulting for a single asset.

A securitization transaction involves shifting the assets from the balance sheet of the originator to the balance sheet of an intermediary which could either be a Special Purpose Vehicle, SPV (a legal entity typically set as a trust to undertake a specific business purpose or activity) for non-stressed/standard assets, or an asset reconstruction company for stressed assets.

In the Indian market, the pooled assets are sold to the investors either in the form of pass-through certificates (PTCs), which are like bonds, for standard assets, or security receipts (SRs) for stressed assets. PTCs or SRs represent claims on incoming cash flows (like the principal repayments and interest) from such pooled assets.

PTCs vs DAs

Apart from PTCs, banks and financial institutions in India are allowed to enter Direct Assignment (DA) transactions to sell their loan books at a fixed interest rate to other banks or financial institutions. Such transactions do not involve an SPV or the issuance of PTCs.

Over the last few years, the proportion of DAs compared to PTCs in retail loan securitizations has been reducing and continues to do so due to the expected fall in gold loan and mortgage securitizations as well as the rise in co-lending deals. PTCs are expected to gain a higher proportion due to the increasing share of asset classes like vehicle loans, microfinance, business loans, and personal loans in the securitization volume.

Originator Group – A Trend reversal

It has been noted that the significant rise in securitization volume in Q2FY25 is driven by private-sector banks. The banks resorted to securitization as selling down loan portfolios will help them improve their credit-to-deposit (CD) ratio, which indicates how much the banks lent for every rupee received in deposits.

This is a key trend reversal in the securitization market in terms of the nature of originators. Earlier, the originators in the securitization market were mainly small finance banks but private sector banks have started entering the segment lately as originators due to concerns raised by the Reserve Bank of India on the alarming rise in CD ratio, which is an important health indicator of a bank.

In March 2024, the CD ratio stood at 78.1% (80.3% considering the impact of the merger of HDFC with HDFC Bank), which was the highest since 2005. A very high CD ratio means that bank lending is very high compared to its deposits signaling higher risk and pressure on liquidity. It could lead to difficulty in meeting obligations for the banks.

In Q2 FY25, roughly 35% of securitized assets were originated by private sector banks (in ICRA-rated transactions). In fact, bank-originated securitization volumes surged over 50% to INR 10,000 crore in FY24 from INR 6,600 crore in FY23. NBFCs also continue to take the securitization route to diversify their liabilities and improve the asset-liability mismatch.

Distribution of Securitization Volume by Asset Classes

Repackaging of vehicle loan receivables continues to be the dominating asset class in India’s securitization market due to their highest share in the PTC market. This is happening due to the large number of originators in vehicle financing, which are predominantly NBCFs, and due to the preferred average tenure of the product. For instance, home loans or loans against property (LAP) have a lower share in the PTC market compared to vehicle loans due to their longer tenure and interest risks. ICRA noted that the share of personal loans remains healthy in the PTC market because investors enjoy higher yields on these products as well as due to the fact that banks are increasingly repackaging them to maintain the planned mix of unsecured loans in the overall portfolio.

Conclusion

The annual securitization volume in India took a hit due to the COVID-19 pandemic and it is yet to recover to pre-Covid levels. The market is still at an early stage as evident from the size of the Indian PTC market, which accounts for less than 1% of issuances in the global securitization market and is even lower than in countries like Australia, Canada, and Latin America. In 2022, the size of PTC issuances in India constituted a meagre 0.04% of the GDP, however, in the US, it is nearly 10% (CareEdge).

Nevertheless, there is strong momentum in the market due to several factors. ICRA projected the securitization market volume to cross INR 2 lakh crore in FY25. The increasing participation of private sector banks as originators is expected to boost the volume and instill confidence in the market. Further, due to the increase in risk weighting by RBI for bank loans to NBFCs by 25 percentage points (Nov 2023), NBFCs are expected to resort to securitization to diversify their resource mix.

These apart, the Indian retail securitization pools have performed well through the past decade steering through several crises, which will continue to support the securitization market. For instance, securitization pools backed by vehicle loans rated by CRISIL showed stable performance and witnessed a median collection efficiency in the range of 97% to 101% in Q1FY25, while for mortgage-backed transactions, the median collection efficiency ranged from 98% to 100% in the same period.

Disclaimer:

The views provided in this blog are of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment. ?