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August 07, 2017 location Mumbai

Securitisation market hits a trillion, propelled by PTCs

However, PSLCs cast a long shadow

The value of securitisation transactions surged 47% to a lifetime high of Rs 102,500 crore in fiscal 2017 despite two speed-breakers - demonetisation, and the advent of priority sector lending certificates (PSLCs). Significant priority sector lending targets of the private sector and foreign banks, and industry-wide chase for retail credit growth meant securitisation of retail assets soared.

The volume of pass-through certificates (PTCs) rocketed 74% to a decadal high of Rs 42,800 crore compared with Rs 24,500 crore in fiscal 2016, driven by clarity on distribution tax (provided in the Union Budget of February 2016) and demand from private-sector banks. The volume of direct assignments (DAs; or direct sale of loans by originators – mostly non-banking finance companies - to banks) reported flattish growth of 6.8% to Rs 47,700 crore. Additionally, a few large transactions in future-flow securitisation and commercial mortgage-backed securities - estimated transaction volume ~Rs 12,000 crore - helped crank up the overall volume.

Says Krishnan Sitaraman, Senior Director, CRISIL Ratings: “Tax clarity gave a big fillip to the securitisation market. The shift back to PTCs augurs well for the healthy development of the market due to protection for investors against potential pool delinquencies through credit enhancement coupled with regular monitoring and greater transparency in pool performance.”

Non-banking finance companies (NBFCs) focusing on vehicle finance, and small finance bank applicants benefited from the high demand for priority sector lending assets. Demonetisation had a material but temporary impact on volumes between November and January 2017 as investors turned risk averse in light of the drop in collection performance of non-housing asset classes.

Securitisation volume fell to Rs 10,000 crore in the third quarter of the fiscal from Rs 28,000 crore in the second quarter. Collections in CRISIL-rated securitised pools of vehicle loan receivables saw a V-shaped recovery in January 2017, which revived investor confidence and led to a surge in investments in February and March 2. As a result, volumes in the fourth quarter rose to Rs 35,000 crore.

Securitisation transactions in asset-backed securities (ABS) grew 24% to Rs 49,600 crore, largely driven by vehicle loans. Within ABS issuances, the microfinance sector remained under stress because of demonetisation-related impact and local socio-political issues, which continue to impact collections. Consequently, the volume of microfinance receivables securitised dropped sharply to Rs 1,900 crore in the fourth quarter as compared to Rs 8,700 crore during first nine months of fiscal 2017.

Mortgage-backed securities (MBS) remained the largest asset class in securitisation, growing 39% and raking up transactions worth Rs 41,000 crore. That also provided an offset to poor credit growth in banking. While public sector banks had led the way in MBS investments in fiscal 2016, private banks invested in ~70% of MBS transactions in fiscal 2017.

Banks continued focus on retail loan book growth, together with the active participation of non-banks - mutual funds and treasuries of NBFCs – which, kept demand for non-priority sector loan (NPSL) securitisation buoyant. NPSL transactions formed 32% of retail asset securitisation volume in fiscal 2017, as investors were drawn by attractive yields before demonetisation spawned a temporary risk aversion.

However, the introduction of priority sector lending certificates (PSLCs), impacted securitisation volume. CRISIL estimates that offers of Rs 126,000 crore were put on the PSLC platform during fiscal 2017. Because of ease of purchase and absence of risk and asset transfer, traded volume in PSLCs zoomed to Rs 49,800 crore in its first year. Around 55% of these transactions were from two categories – the PSLC Small and Marginal Farmers, and PSLC Agriculture. Regional rural banks, which have been key players in the inter-bank participation certificate (IBPC) market, a small finance bank, and a few private banks with excess PSL general assets were active sellers.

Says Divya Chandran K, Associate Director, CRISIL Ratings: “We expect NPSL securitisation to be a focus area this fiscal. We also see the potential for banks to originate securitisation deals where corporate loans, infrastructure assets and trade receivables would be the underlying assets.”


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