The Finance Budget, 2016 was one of the high points for the securitisation market in India as it cleared two long drawn issues in the market at one go. First, the securitisation distribution tax was withdrawn. Second, the foreign portfolio investors were allowed to make investments in securitised debt instruments.

While the first of the two was implemented with effect from 1st June, 2016, the other one is yet to be put to effect completely.

Owing to the first change, there has major change in the performance of the securitisation industry in India. The market, which was mainly dominated by direct assignment transactions, witnessed a substantial amount of PTC transactions during the first nine months after the change.

The figure below shows the securitisation volume for the past few years:

Source: Care Ratings[1]; VKC Estimates [Figures in INR crores]

Though the Finance Budget had resolved the concerns that were stopping the mutual funds to invest in securitised instruments, they continued to be reluctant to invest in the securitised instruments even after the Budget changes. It is not the tax worries that is keeping the mutual funds away, but this time it is the poor quality of the originated assets that is holding back the mutual funds to participate.

A major portion of the assets securitised are originated by the NBFCs which generally are weak. This is mainly due to the over-ambitious targets that the NBFCs are required to achieve which forces them to take hasty decisions during credit approval.

This sort of practices keep the mutual funds worried about the quality of the actual quality of the securitised assets and therefore, put them in a dilemma on whether or not go full throttle in the securitisation market.

It is believed that the mutual funds will continue to stay away unless there is a shift in the monumental shift in the business strategy of the NBFCs in the country.