Securitisation and covered bonds for housing finance

2019 Securitisation volumes in India reach record high

By Falak Dutta (finserv@vinodkothari.com)

Up, Up & Above!

Yet another year went by and Indian securitization market certainly had a year to rejoice. Starting from the volume of transactions to innovative structures, the market has everything to boast about. Before we discuss each of these at length, let us take stock of the highlights first:

  • The securitization volumes doubled during the year, as securitization in India became a trillion rupee market.
  • DAs continued to be the preferred mode of transaction with Mortgages as the dominant asset class.
  • Clarity on Goods & Services Tax, increased participation of private banks, NBFCs and mutual funds along with healthy demand for non-priority sector loan were primary reasons for this sharp growth.
  • DHFL & IL&FS rushed to securitize as traditional sources of funding dried up due to concerns of debt servicing in the 2nd half of 2018.
  • The country witnessed the first issuance of covered bonds during year.
  • Several new structures were tried, namely, lease receivables securitization, corporate loan securitization, revolving structures etc.

Securitization volumes reaching all time high

The volume of retail securitization grew by 123% as figures soared to ₹1.9 lakh crore compared to ₹85,000 crore in fiscal ’18. Mortgages, vehicle loans and microfinance loans constituted the three major asset classes comprising of 84% of the total volume. The growth was primarily propelled by a combination of three factors.

First, a few big players who stayed away from the market returned after the GST Council clarified that securitized assets are not subject to GST.

Second, Two non-banking companies (DHFL& IL&FS) rushed to securitize their receivables as traditional sources of financing dried up after September 2018. After this, banks started preferring portfolio buyouts over taking credit exposure on the NBFCs.

Third, subsequent to the liquidity crisis faced by several NBFCs, RBI relaxed guidelines of minimum holding period requirement for securitization transactions backed by long duration loans leading to greater number of eligible securitized assets.

The graph below shows the performance of the Indian securitization market over the years:

Source: CRISIL Estimates. Figures in ₹10 Billions

Traditionally the bulk of securitization transactions have been driven by Priority Sector Lending (PSL) from banks. At present though, securitization transactions are being increasingly backed by non PSL assets that are making their presence felt as they gain market traction. The trend has been clear. The share of non-PSL assets as a part of total transaction rose to a record of 42% in 2018, up from 33% in 2017 and a relatively moderate share of 26% in 2016. Banks are focusing on securing long term assets such as mortgages that have displayed fairly stable asset quality to expand their retail asset portfolio.

The case for PSLCs

An additional recurring theme is the growing popularity in PSLCs which serves as a direct alternative to securitization. The volume of transactions have skyrocketed to ₹ 3.3 lakh crore in fiscal ’19 up from ₹ 1.9 lakh crore in fiscal ‘18 and ₹ 49,000 crore in fiscal ‘17. PSLCs which were introduced in 2015, was an idea which appeared in the report of a Dr. Raghu Ram Rajan led Committee- A Hundred Small Steps. Out of the four kinds of PSLCs, the PLSC- General and PSLC- Small and Marginal Farmers remain the highest traded segments. The supply side consists of private sector banks with excess PSL in the general PSLCs category and Regional Rural Banks in SFMF category.

PTCs vs. DAs

Another point of note is the increasing share of the DA’s in the securitization market. The move from PTCs to DA isn’t surprising given the absence of credit enhancements, amount of capital requirements and relatively less regulatory due diligence in DAs. The fact that the share of PTC transaction fell from 47% in fiscal ‘17 to 42% in fiscal ’18 and further to 36% in fiscal ’19 serves as a case in point. However, one hasn’t impeded the growth for the other. DA transactions soared a record 146%. Whereas PTCs soared 95% reaching a volume of ₹69,000 crore. Also, mortgages still remain the preferred asset class, accounting for almost 74% of DA volumes and 46% of total securitization volumes.

Source: CRISIL1 Estimates

Source: CRISIL[1]

India on the Global Map

2018 was a landmark year for global securitization with over a trillion dollars’ worth of issue, as the memories of the 2008 crisis gradually fade into oblivion. The U.S has been the major player in the global market, issuing over half of the total transactions by volume. Europe recorded a surge in volume clocking $106 billion against $82 billion in 2017. In Asia, China both grew and remained the dominant player in Asia at $310 billion, followed by Japan at $58 billion. Elsewhere issuance in Australia and Latin America declined. Some potential factors that could affect the global markets in the coming future include the Brexit uncertainty, market volatility, rising interest rates, renegotiations of existing trade agreements and liquidity. Some of these are contentious issues, the effects of which could sustain beyond the near future.

 

Source: SP Global[2], Values in $US Billion

Conclusion

Heading into the next fiscal year, some of the tailwinds that propelled the market in fiscal 2019 are fading gradually. Pent-up supply following the implementation of the Goods and Services Tax (GST) has almost exhausted, the funding environment for non-banks have been steadily stabilizing and the relaxation on the minimum holding period will be only available till May 2019. The entry of a new segment of investors- NBFC treasuries, foreign portfolio investors, mutual funds and others such brought about differing risk appetites and return aspirations which paved the way for newer asset classes. The trend for education loan receivables and consumer durables loan receivables accelerated in fiscal 2019. Although, the overall volumes of these unconventional asset classes are relatively small at present, investor presence in these non-AAA rated papers is a good sign for the long term prospects of the securitization markets.

“The Indian securitization market in 2018 have attained several significant milestones: from significant growth in non-PSL volumes, to asset class diversity, to attracting new investor base, to innovative structures, the market seems ready to launch into a new trajectory.”, stated Mr. Vinod Kothari, Director at Vinod Kothari Consultants.

He added, “It is only in stressful times that securitization has shone globally– the Indian financial sector has gone through some stress scenarios in the recent past, and securitization has been able to sustain the growth of the financial sector.”

 

Sources:

1) https://www.crisil.com/content/dam/crisil/our-analysis/reports/Ratings/documents/2018/june/securitization-resilient-despite-roadblocks.pdf

6) https://www.spglobal.com/en/research-insights/articles/global-structured-finance-outlook-2019-securitization-continues-to-be-energized-with-potential-1-trillion-in-volume-expected-ag

[1] https://www.crisil.com/content/dam/crisil/pr/press-release/2017/12/retail-securitization-volume-doubles-to-rs-1point9-lakh-crore.pdf

[2] https://www.spglobal.com/en/research-insights/articles/global-structured-finance-outlook-2019-securitization-continues-to-be-energized-with-potential-1-trillion-in-volume-expected-ag

Securitisation laws prevailing in various countries are listed below :

  • Singapore:
  1. Monetary Authority of Singapore (MAS) Guidelines on Securitisation (The guidelines were finalized in 2000)
  2. Amendment in 2018
    http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulations%20Guidance%20and%20Licensing/Finance%20Companies/Notices/MAS%20Notice%20832%20%20Amendment%20%202018.pdf
  3. Amendment in 2007
    http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulations%20Guidance%20and%20Licensing/Commercial%20Banks/Regulations%20Guidance%20and%20Licensing/Notices/MAS%20Notice%20628%20(2007).pdf
  4. News on Securitisation
    http://vinodkothari.com/2013/11/sing/
  5. Rules on Securitisation
    http://vinodkothari.com/seclawsg/
  • USA:
  1. 15 U.S. Code § 78o–11. Credit risk retention:
    https://www.law.cornell.edu/uscode/text/15/78o-11
  2. Dodd-Frank Wall Street Reform and Consumer Protection Act [Public Law 111–203] [As Amended Through P.L. 115–174, Enacted May 24, 2018]
    https://legcounsel.house.gov/Comps/Dodd-Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act.pdf
  3. Securitisation Market
    http://vinodkothari.com/secusa/
  4. Laws on Securitisation
    http://vinodkothari.com/seclawus/
  • Australia:
  1. Australian Prudential Standard (APS) 120 made under section 11AF of the Banking Act 1959 (the Banking Act) By Australian Prudential Regulation Authority
    https://www.apra.gov.au/sites/default/files/aps_120_securitisation.pdf
  2. Covered Bonds issued under Part II, Division 3A of the Banking Act 1959 (Cth)
    https://www.legislation.gov.au/Details/C2017C00067
  3. Laws on Securitisation
    http://vinodkothari.com/seclawaustral/
  4. Securitisation Market
    http://vinodkothari.com/austral/
  • Indonesia:
  1. Bank Indonesia Regulation No. 7/4/PBI/2005 Prudential Principles in Asset Securitisation for Commercial Banks
    https://www.bi.go.id/en/peraturan/perbankan/Pages/bir%207405.aspx
  2. Securitisation Market
    http://vinodkothari.com/secindon/
  • Hong Kong: 
  1. There is no specific legislative regime for securitisation. Securitisation is subject to various Hong Kong laws, depending on the transaction structure, transaction parties, underlying assets, and the nature of the offering of the securities
  2. Securitisation Market
    http://vinodkothari.com/sechong/
  • Canada:
  1. Office of the Superintendent of Financial Institutions, Government of Canada
    http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/CAR18_chpt7.aspx
  2. Securitisation Market
    http://vinodkothari.com/seccanad/
  • European Union:(UK, Germany, France,Italy, Sweden, Poland, Spain, Greece, Finland, Malta)
  1. Regulation(EU) 2017/2402 (the Securitisation Regulation) as on December 12,2017
    https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R2402
  2. Regulation (EU) 2017/2402 of the European Parliament and of the Council of September 30, 2015
    https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A52015PC0472
  3. Securitisation Market:
    http://vinodkothari.com/europe/

 

  • Italy:
  1. Law 130 of 30 April 1999, Italian securitisation law
    https://www.housing-finance-network.org/fileadmin/user_upload/hfn/Country_Law/Law-Italy/2006-00281.pdf
  2. Securitistion Market
    http://vinodkothari.com/secitaly/
  • Greece:
  1. GREEK LAW 3156/2003
    http://www.greeklawdigest.gr/topics/finance-investment/item/317-securitization-law-bonds-l-3156-2003
  • France:
  1. Order No. 2017-1432 of October 4, 2017 , Modernizing the Legal Framework for Asset Management and Debt Financing (Initial Version)
    https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000035720833&categorieLien=id
    Version in force on 26/03/2019
    https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000035720833&dateTexte=20190326
  2. Securitisation Market:
    http://vinodkothari.com/france/
  • Japan: Securitisation in Japan is governed by laws and regulations applicable to specific types of transactions such as the Civil Code (Law No. 89, 1896), the Trust Act (Law No. 108, 2006) and the Financial Instruments and Exchange Law (Law No. 25, 1948) (FIEL).
  1. https://www.fsa.go.jp/common/law/fie01.pdf
  2. http://jafbase.fr/docAsie/Japon/CodCiv.pdf
  3. http://www.japaneselawtranslation.go.jp/law/detail_download/?ff=09&id=1946
  4. Laws on Securitisation
    http://vinodkothari.com/seclawjapan/
  5. Securitisation Market
    http://vinodkothari.com/japan/
  • China:
  1. Administrative Rules for Pilot Securitization of Credit Assets(the Administrative Rules) on April 2005
    http://www.cbrc.gov.cn/EngdocView.do?docID=1720
  2. Securitisation Market
    http://vinodkothari.com/secchina-2/
  • Ireland:
  1. European Union (General Framework For Securitisation And Specific Framework For Simple, Transparent And Standardised Securitisation) Regulations 2018 (Central Bank of Ireland)
    http://www.irishstatutebook.ie/eli/2018/si/656/made/en/pdf
  • South Africa:
  1. In South Africa, securitisations are regulated according to the securitisation regulations issued under the Banks Act 94 of 1990 (the Banks Act)
    https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/2591/Banks+Amendment+Act+2007%5B1%5D.pdf
  1. Government Gazette 30628 of 1 January 2008 (Securitisation Regulations)
    https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/2734/30628%20sec%20schemes%202008.pdf
  2. Laws on Securitisation
    http://vinodkothari.com/seclawsa/
  3. Securitisation Market
    http://vinodkothari.com/secafric/
  • Morocco:
  1. Law No. 33-06 on Securitization
  2. Draft amendment of Law on Securitization
    http://www.sgg.gov.ma/portals/0/AvantProjet/8/Projet_loi_Amendement-titrisation_Ang.pdf

RBI removes cap on investments in corporate bonds by FPIs

By Abhirup Ghosh (abhirup@vinodkothari.com), (finserv@vinodkothari.com)

The Reserve Bank of India (RBI) in its Sixth Bi-monthly Monetary Policy Statement for 2018-19 dated February 07, 2019[1] had declared that for the purpose of widening the spectrum of investors in the Indian corporate bond market, it will remove the cap on investment to be made by FPIs on corporate bonds. In furtherance to the declaration, the RBI on 15th February, 2019[2] issued a notification giving effect to the proposal.

Before we understand what the impact of the notification will be, let us recapitulate what the restrictions were. Read more

Accounting for Direct Assignment under Indian Accounting Standards (Ind AS)

By Team IFRS & Valuation Services (ifrs@vinodkothari.com) (finserv@vinodkothari.com)

Introduction

Direct assignment (DA) is a very popular way of achieving liquidity needs of an entity. With the motives of achieving off- balance sheet treatment accompanied by low cost of raising funds, financial sector entities enter into securitisation and direct assignment transactions involving sale of their loan portfolios. DA in the context of Indian securitisation practices involves sale of loan portfolios without the involvement of a special purpose vehicle, unlike securitisation, where setting up of an SPV is an imperative.

The term DA is unique to India, that is, only in Indian context we use the term DA for assignment of loan or lease portfolios to another entity like bank. Whereas, on a global level, a similar arrangements are known by various other names like loan sale, whole-loan sales or loan portfolio sale.

In India, the regulatory framework governing Das and securitisation transactions are laid down by the Reserve Bank of India (RBI). The guidelines for governing securitisation structures, often referred to as pass-through certificates route (PTCs) were issued for the first time in 2006, where the focus of the Guidelines was restricted to securitisation transactions only and direct assignments were nowhere in the picture. The RBI Guidelines were revised in 2012 to include provisions relating to direct assignment transactions.

Read more

RBI temporarily relaxes the Guidelines on Securitisation for NBFCs

By Financial Services Division, finserv@vinodkothari.com

 

In the wake of the recent hues and cries of the entire country in anticipation of a liquidity crisis in the NBFC sector, the Reserve Bank of India, on 29th November, 2018, issued a notification[1] to modify the Securitisation Guidelines.The amendment aims to relax the minimum holding period requirements of the guidelines, subject to conditions, temporarily. Therefore, the changes vide this notification come with an expiry date. The key takeaways of the notification have been discussed below:

a. Relaxation in the MHP requirements: As per the notification, NBFCs will now be allowed to securitise/ assign loans originated by them, with original maturity of more than 5 years, after showing record of recovery of repayments of six monthly instalments or two quarterly instalments (as applicable). Currently, for loans with original maturity more than 5 years, the MHP requirements are repayment of at least twelve monthly instalments or four quarterly instalments (as applicable).

b. Change in MRR requirements for the loans securitised under this notification: The benefit mentioned above will be available only if the NBFC retains at least 20% of the assets securitised/ assigned. Currently, the MRR requirements ranges between 5%-10% depending on the tenure of the loans.

c. Timeline for availing this benefit: As already stated above, this is a temporary measure adopted by the RBI to ease out the tension relating to liquidity issues of the NBFCs; therefore, this comes with an expiry date, which in the present case is six months from the date of issuance of the notification. Therefore, this benefit will be available for only those loans which are securitised/ assigned during a period of six months from the date of issuance of this notification.

The requirements under the guidelines remains intact.

Further, the RBI has extended the relaxation till December 31, 2019 vide its notification dated May 29, 2019.

To summarise, the MHP requirements and the MRR requirements on securitisation/ assignment of loans looks as such –

Loans assigned between 29th November, 2018 – 30th December, 2019 Loans assigned after 31st December, 2019
MHP requirements for loans with original maturity less than 5 years Loans upto 2 years maturity – 3 months

 

Loans between 2 – 5 years – 6 months

Loans upto 2 years maturity – 3 months

 

Loans between 2 – 5 years – 6 months

MHP requirements for loans with original maturity less than 5 years If revised MRR requirements fulfilled – 6 months

 

If revised MRR requirements not fulfilled – 12 months

Loans upto 2 years maturity – 3 months

 

Loans between 2 – 5 years – 6 months

MRR requirements for loans with original maturity of less than 5 years Loans with original maturity upto 2 years – 5%

 

Loans with original maturity more than 2 years – 10%

Loans with original maturity upto 2 years – 5%

 

Loans with original maturity more than 2 years – 10%

MRR requirements for loans with original maturity of more than 5 years If benefit of MHP requirements availed – 20%

 

If benefit of MHP requirements not availed – 10%

Loans with original maturity upto 2 years – 5%

 

Loans with original maturity more than 2 years – 10%

 

Vinod Kothari comments: 

  •  Loans with original maturity of more than 5 years are essentially home loans and LAP loans. Home loans are housed mostly with HFCs. These guidelines ought to have come from NHB rather than RBI, but given the tradition that RBI guidelines are followed in case of HFCs as well, this “relaxation” will be more applicable to HFCs rather than NBFCs.
  • In case of LAP loans, given the current credit scenario prevailing in the country, taking exposure on LAP loans itself is subject to question. Issue is – will the relaxation prompt NBFCs to write LAP loans, or will it simply allow them to package and sell existing pools of lap loans sitting on their books waiting for the MHP of 12 months to get over? It is more likely to be latter than the former.
  • However, the so-called relaxation comes with a give-and-take – the MRR is 20%. The NBFC has, therefore, 2 options – wait for 12 months to be over and just do a transaction with 10% MRR, or avail the so-called relaxation and put in on-balance funding of 20%. Therefore, it is only for those who are desperate for refinancing that the so-called relaxation will seem appealing.
  • Our interaction with leading NBFCs reveals that there are immediate liquidity concerns . Banks are not willing to take on-balance sheet exposure on NBFCs; rather they are willing to take exposure on pools. Therefore, for more than 6 months and less than 12 months seasoned LAP pools, this might provide a temporary packaging opportunity.
  • This is indeed the best time to think of covered bonds. The proposition has been lying unresolved for last few years. If banks are willing to take exposure on pools, why not dual recourse by way of covered bonds? That indeed provides ideal solution, with ring fenced pools providing double layers of protection.

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11422&Mode=0

For more articles on Securitisation and Covered Bonds, refer our page here.

Also refer our article: The name is Bond. Covered Bonds.