Securitisation volume surged nearly 70% to Rs ~35,000 crore in the first quarter this fiscal on-year, primarily because of increased economic activity. Further, the base effect caused by low volumes last fiscal due to second wave of the pandemic also played a part. Q1 volumes this fiscal even surpassed that seen in fiscal 2019 but remained lower than that witnessed in fiscal 2020.

In fact, volumes in the first quarter could have been even higher but for the rising inflation and higher interest rates that have spawned caution over the repayment ability of borrowers, and divergent yield expectations among originators and investors. Consequently, despite the apparent return of enthusiasm among participants, a number of deals fell through at the quarter-end. Still, negligible disruption in collections and stable pool performance supported uptick in volume.

Mortgage-backed securitisation (MBS) loans comprised ~45% of quarterly volume (see Chart 1 in annexure) compared with 53% in the corresponding period of the previous fiscal. Asset backed securitisation (ABS) comprised the balance.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, “More than 80 non-bank entities being present in the market in the first quarter, up from ~50 last fiscal, indicates strong comfort originators have with the securitisation process. Market activity in the past quarter also reflected the diversity of various asset classes across secured and unsecured loan categories.”

In ABS, commercial vehicle (CV) loans comprised 49%, and microfinance 20% of transaction value, with many underlying loans eligible for priority sector lending (PSL) classification. Gold loans (14%) continued to shine, while two-wheeler, education, school finance and unsecured loans saw renewed investor interest.

Nearly 60% of the overall volume was securitised through the direct assignment (DA) route (see Chart 2 in annexure), while the proportion of pass-through certificate (PTC) issuances fell to 40% from 48% during April-June 2021. Even as DA transactions backed by gold and unsecured loans drew investor interest, mortgage loans saw the maximum action in DAs.

Public and private sector banks were the largest investors driven by their retail drive and PSL targets. They invested in more than two-thirds of the quarterly securitised volume. Foreign financial institutions, including banks, acquired ~17% of all assets securitised.

A stable market environment could mean deeper participation by other large investors, including foreign institutions and mutual funds. These groups were key players in the pre-pandemic market. Time-tranched or replenishing structures, and high-yield asset classes such as lease rental and personal loans could persuade them to return. Also, the performance of past securitised pools and stable collections despite episodes of adversity could entice traditional investors such as banks to increase their investments in securitised issuances.

Says Rohit Inamdar, Senior Director, Crisil Ratings, “Until now, banks were the dominant investors in securitisation. Others, including foreign investors, may be drawn by the stable performance of past pools and be willing to experiment with innovative structures and newer asset classes."

Going ahead, securitisation may become a key funding source for non-banks focusing on loan book growth by increasing disbursements after a prolonged slowdown. It can also be attractive investment avenue for banks looking to grow their retail assets. As the macro-situation and interest rates stabilise, deals may pick up further, propelling the securitisation market volume to reach near pre-pandemic highs. Securitisation transactions touched highs of Rs.1.9 lakh crore in fiscals 2019 and 2020 before the pandemic put brakes on its momentum (see Chart 3 in annexure).

That said, any sharp rise in interest rates, high inflation and future waves of the pandemic and their impact on economic activity will be key variables which could be potential headwinds for securitisation volumes this fiscal.

Annexure