Retail Loan Securitisation Surges To A Record In FY19

Securitisation of retail loans doubled to a record in the last financial year as several large non-bank and mortgage lenders rushed to sell loans amid a liquidity crunch.

About Rs 1.9 lakh crore worth of retail loans were securitised in the year ended March, according to a report by Crisil. That compares with Rs 85,000 crore worth of loans sold a year earlier.

Availability of assets that can be securitised increased after the RBI reduced by half the minimum holding period before which housing finance companies and non-bank lenders can sell loans, according to Crisil Ratings. The central bank in November brought down the duration to six months from one year to ease liquidity shortage following defaults by IL&FS group.

The immediate fallout of the crisis at Infrastructure Leasing and Financial Services Ltd. was that money-market borrowing rates rose between September and November 2018. Housing finance companies were pushed to lower their disbursements and meet a sizable portion of their fund requirement by selling loan portfolio, said Supree Nijar, vice president at ICRA Ltd.

Rohit Inamdar, senior director at Crisil Ratings, said the spotlight shone on asset-liability maturity management by the recent liquidity crunch should result in non-banks reducing their dependence on short-term funding. “The RBI constituting a committee to enable development of housing finance securitisation also augurs well for the market.”

Most-Securitised Loans

Mortgages, vehicle loans and microfinance loans constituted about 84 percent of the securitisation volume, Krishnan Sitaraman, senior director at Crisil Ratings, said in the report. “While growing investor comfort with these asset classes and steady asset quality metrics supported growth, we also saw relatively newer asset classes such as gold loans, small and medium enterprises loans and personal loans also getting securitised, underscoring a potential broad-basing of the market.”

Loans are securitised in two ways. A direct assignment transaction and a pass-through certificates route.

In a direct assignment, the loan portfolio moves from the non-banking or housing finance company's balance sheet to the bank's, while the non-bank lender continues to service the loan. In a pass-through transaction, the interest earned on the loan is passed to the holders or investors (banks) in the form of a fixed income, while the loan is transferred to a common trustee or a special purpose vehicle. The investor doesn't own the loan portfolio in this case, unlike a direct assignment transaction. In both cases, the non-bank lender receives funds upfront.

Of the Rs 1.9 lakh-crore retail loans sold in FY19, around 64 percent was securitised through the direct assignment route while the remaining Rs 69,000 crore worth of loans were securitised through the pass-through certificates route, Crisil said. That compares with 58 percent and 42 percent, respectively, in FY18.

About 92 percent of all the mortgages that were securitised by non-banks last year were sold directly to public sector banks, Crisil said.

A Mortgage Securitisation Market

The Reserve Bank of India, in its April 4 statement on developmental and regulatory policies, said it would set up a committee to look at standardising asset securitisation practices and propose measures for creating a housing finance securitisation market in the country.

“Globally, residential and commercial mortgages are supported by well-lubricated securitisation markets whereby mortgage originators package portfolios of mortgages and resell them in capital markets as mortgage-backed securities or covered bonds,” the RBI said. Such markets “enable better management of credit and liquidity risks” for banks and non-banks.

But the 2008 global financial crisis was caused by over-indulgence in securitisation by top investment banks and mortgage originators in the U.S. A regular loan was first securitised into a mortgage-backed security, and then several such contracts were re-packaged into a new security called a collaterised debt or loan obligation.

The pace and comfort with which the financial system in the U.S. packaged and traded these securities is something that the RBI will want to avoid.