Decoupling from direct assignments, Indian securitisation moves the global way

– Vinod Kothari, Director | vinod@vinodkothari.com

The data for securitisation transactions in India for the first half of FY24 are just out, and some remarkable features are:

• Sharp growth – nearly 40% on YoY basis, to cross Rs 100000 crores H1FY24.
• Proper securitisations, that is, PTC transactions, register almost 90% growth
• Direct assignment volumes may further reduce relatively, post the merger of HDFC into HDFC Bank
• Asset-backed securities as an asset class increased share from 45% in FY 23 to 53% in FY 24.

With this, securitisation markets in India have truly started moving towards maturity. The so-called direct assignment/DA (now under regulations termed as Transfer of Loan Exposures) was a market aberration and was a convenient way for lenders to shift priority sector loan exposures. During the half year, the impact of the HDFC Ltd-HDFC Bank merger might have had some impact; it will see more impact going forward, as the bulk of the DA business was accounted for by the erstwhile duo. Further, co-lending has emerged as a very convenient alternative to direct assignments.

A report from Care Ratings states that the main asset classes in PTC/securitisation were auto loans (both commercial and  passenger, as also two wheelers), financing of equipment, tractors, etc.,  followed by LAP loans and MFI loans. 

Securitisation regulations were revamped in September 2021, with the RBI segregating the regulatory framework for loan transfers and securitisation. There was a considerable relaxation of the regulations on securitisation in the RBI regulatory framework. While it will remain questionable whether the present surge is partly owing to the revised regulatory framework, some of the reasons that may have clearly brought about the surge are as follows:

• There is an increased risk appetite in the market. Banks are increasingly able to rely on unsecured lending and personal loans. The concern was clearly vocalised by the RBI Governor . The Governor stated: “ Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards.”
• There is an increasing breed of fixed income investors, from family offices to HNIs who are looking for yield pick ups. Securitisation just seems to be the right instrument.
• Overall, there is a feel-good spectrum across the economy as the country looks at an impressive GDP growth rate of 6.5%. There is substantial consumer spending, as the household savings rate has dropped and the spending rate has increased. We seem to be entering a new paradigm of “Kharcho India Kharcho”, as fintech lenders entice people to spend more than ever. In fact, the RBI Bulletin quotes a press report saying India is expected to become the world’s 3rd largest consumer spender by 2027.

As regards securitisation in the non-financial space, the regulatory framework still seems lopsided, since the RBI regulations seem like discouraging financial entities from buying tranches of securitisation of non-financial assets, even if the same are done as per SEBI’s existing framework. There is a strong need for the two regulations to talk to each other. This is one potential that the country and its investor class cannot afford to miss, as there is a whole lot of potential future flows that may be securitised.

Our Resources related to the topic:

1. Securitisation: Indian market grows amidst global volume contraction
2. Securitisation of stressed loans: Opportunities and structures
3. The sale of season: Holding period requirements for assignments and securitisation
4. Three significant changes in Securitisation Directions
5. Stressed for reform: RBI proposes stressed assets securitisation and loss provisioning