A challenging year, made noteworthy by burgeoning non-PSL securitisation

After posting a compound annual growth rate (CAGR) of 53.5% between fiscals 2015 and 2017, the Indian securitisation market hit the brakes last fiscal. Fiscal 2018 saw Rs 95,100 crore of transactions (7.2% lower on-year), of which Rs 84,700 crore was retail asset securitisation (6.5% lower on-year) and the balance was primarily future flow structured transactions.

Three major factors contributed to the drop in securitisation volumes last fiscal.

First, the traded volume of Priority Sector Lending Certificates (PSLCs) zoomed to 3.7 times that in fiscal 2017. Higher reliance of banks on PSLCs to meet their priority sector lending (PSL) mandate, bypassing the securitisation route, kept demand for PSL asset securitisation muted.

Second, in marked contrast to previous years, yields on pass through certificates (PTCs) hardened during the fourth quarter of fiscal 2018, with originators having to offer 25-50 basis points (bps) higher yield compared with prior quarters at the same rating level for similar asset classes. The higher ask in terms of yields prompted some originators to pare their securitisation plans for the quarter, while a few investors adopted a wait-and-watch approach in the steadily rising interest rate environment, impacting retail asset securitisation volumes. Only ~Rs 26,000 crore of securitisation happened in the fourth quarter of last fiscal, compared with ~Rs 36,000 crore in the corresponding year-ago quarter.

Third, ambiguity over the applicability of Goods and Services Tax (GST) on securitisation transactions dealt a heavy blow. While most originators relied on opinion from independent market participants to return to the market in the second half of the fiscal, a few large players kept away, awaiting official clarification from the GST Council. These large players had accounted for ~20% of the overall retail securitisation volume in fiscal 2017.

While the growing popularity of PSLCs was expected to dampen demand for PSL asset securitisation, the turmoil on account of rollout of GST and hardening of interest rates in the fourth quarter came as a bit of a surprise.

Despite these roadblocks, the volumes dropped only modestly, by 7.2%, as the market adapted to the shifting demand-supply dynamics, as listed below, revealing its inherent resilience.