Indian Securitisation Market Hits All-Time High, But New Instrument Casts Doubt

India's securitisation market surged to an all-time high in financial year 2016-17 despite a marked slowdown due to demonetisation and the introduction of a new debt instrument which allows banks to buy priority sector loans directly from each other.

The value of securitisation transactions in India rose 47 percent to Rs 1.02 lakh crore in FY17, according to report by ratings agency CRISIL. “Significant priority sector lending targets of private sector and foreign banks, and industry-wide chase for retail credit growth meant securitisation of retail assets soared”, the agency said in a separate media statement.

Securitisation is a way in which institutions can bundle assets and sell securities representing the underlying assets to investors. It is often used as a way to unlock capital. In India, however, the securitisation market had been slow to pick up due to lack of demand from institutional investors.

In India, securitisation is a “nascent market” where investors are still “not too comfortable investing in complex instruments” like securitised assets, Krishnan Sitaraman, senior director at CRISIL Ratings, told BloombergQuint.

The increase in FY17 was led by a surge in volumes of pass-through certificates which grew 74 percent to Rs 42,800 crore. PTCs are debt instruments that enable investors to draw interest from the securitised assets. Direct sale of loans – mostly by non-banking financial institutions to banks – saw a “flattish” volume growth at 6.8 percent to Rs 47,700 crore, CRISIL said.

PTCs were preferred over the direct sale route because of higher regulatory diligence and credit enhancement. The removal of a dividend distribution tax on PTCs, announced in Union Budget 2016-17, made yields “more attractive”, CRISIL explained.

Besides, PTCs are the only securitisation route available to mutual funds, bank treasuries, and non-banking financial companies who want to sell securities.

New Challenge

The introduction of priority sector lending certificates by the Reserve Bank of India, in early FY17, may have a “negative impact on both securitisation and inter-bank participation [certificate] volumes”, CRISIL said, adding that it will be the “key roadblock to market growth”.

PSLCs are debt instruments which are issued by banks that have reached a surplus in their priority sector lending targets. Banks who are unable to meet their targets can buy these PSLCs on RBI's trading platform directly, bypassing any form of securitisation.

Priority sectors include agriculture, small and medium enterprises, social infrastructure and renewable energy.

Around Rs 49,800 crore of PSLCs were traded between banks in FY17. Around 55 percent of those were from the small and marginal farmer, and agriculture categories, the rating agency added.

The “ease of purchase” and “absence of risk transfer” make PSLCs an attractive alternative for meeting priority sector lending targets, CRISIL said.

“The full year impact of PSLC introduction will be evident on this fiscal and therefore, the impact of PSLCs on securitisation and IBPC volumes would be more pronounced only at the end of it”, cautioned the ratings agency.

CRISIL expects the demand for priority sector lending to remain high as data from the central bank shows that several top public and private lenders are short on either overall or sub-targets. The demand from foreign banks too will “continue to be healthy” as they've been mandated to increase their priority lending proportion by 2020, the report said.

Cash Crunch Blip

The securitisation market had witnessed a downturn in the third quarter of FY17 as loan collections dried up due to a cash shortage triggered by demonetisation. “Asset quality challenges kept investors away for the rest of the third quarter and the beginning of the fourth quarter", CRISIL noted.

However, demand made a V-shaped recovery, especially due to collections in securitised vehicle loan pools, that helped investors regain confidence and give a filip to investments in March.

Other Highlights

• Mortgage-backed securities remained the most preferred asset class, with total volume surging 39 percent to Rs 41,000 crore in fiscal 2017. The share of MBS in total retail securitisation has gone up to 45 percent now.
• Private lenders invested in around 70 percent of MBS transactions in 2017, as opposed to the previous year where growth was led by public banks.
• Asset-backed securities grew 24 percent to Rs 49,600 crore "largely backed by vehicle loans that piggybacked on demand for priority sector lending assets", CRISIL said.