Indian securitisation enters a new phase: Banks originate with a bang

Abhirup Ghosh | abhirup@vinodkothari.com

The Indian securitisation market has been without banks as originators for nearly 17 years, until HDFC Bank^[1] launched a landmark transaction that may signal their potential return. Prior to the Global Financial Crisis, which raised significant questions about the viability of securitization as a financial product, banks like ICICI Bank were actively involved in the market, with ICICI’s last reported transaction occurring in 2007^[2].

It is notable that erstwhile HDFC Limited, prior to its merger into the Bank, was the largest single originator of home loan securitisations; however, the present transaction is not home loans.

After the GFC, banks shifted from being originators to becoming investors in securitised assets. To meet the priority sector lending targets, banks started investing heavily in the securitisation market, be it in pass-through certificates or through acquisition of loan pools. This was a stark contrast to the situation elsewhere in the world, where the issuances are primarily made by banks.

However, following years of discussion and advocacy, banks are now re-entering the market. This comes amid concerns over declining demand deposits, which have been a persistent worry for both banks and regulators in recent times. HDFC Bank’s recent transaction aims to improve its credit-to-deposit ratio, which stood at 105% prior to the issuance^[3]. The choice of the asset class may also be tactical because car loans attract a higher risk weight of 125%, and in any case, the exposure on retail lending may need to be reduced or restricted. This move reflects a strategic effort to enhance liquidity and manage financial stability in the current environment.

Some key elements of the transaction are as follows:

• Size of the transaction, asset class etc.: With a total issuance size exceeding ₹9,000 crores, this is likely one of the largest securitisation transactions in India to date. The transaction involves the securitisation of car loans from approximately 1.08 lakh loan accounts, featuring a weighted average seasoning of 15.2 months and a weighted average amortization of 20.8%. These metrics indicate a strong repayment track record. Additionally, the pool carries a weighted average internal rate of return of 8.92%, reflecting the premium quality of the assets.
• Structure of the transaction: This is a par structure with multiple tranches.
• Tranches: The transaction includes three senior tranches: Series A1, A2, and A3, all rated AAA (SO). The tranches are time-tranches. Until the A1 tranche is fully repaid, collections will be distributed in an 80:10:10 ratio among A1, A2, and A3. After A1 is fully repaid, the distribution will shift to an 80:20 ratio between A2 and A3 until A2 is completely repaid. The pool has only amortised 20.8% at the time of the transaction, indicating a long remaining maturity. This time-tranching allows for targeting different classes of investors based on their tenure preferences.
• Credit Enhancement: The transaction incorporates both internal and external credit enhancements. The internal credit enhancement consists of a subordinated excess interest spread of 1.5% of the initial POS of the pool. Additionally, there is an external credit enhancement in the form of an unconditional and irrevocable credit collateral guarantee amounting to 5% of the initial POS, provided by a AAA-rated guarantor. If the guarantor’s rating falls below AAA, the guarantee must be replaced with one from a bank rated AAA, or the guarantee must be fully funded and deposited in a AAA-rated bank account in the seller’s name, with a lien marked in favor of the trustee. This external enhancement approach is more cost-effective than traditional cash collateral methods. Even this structure provides for a cash collateral, however, the creation of such is contingent upon the originator’s inability to secure a guarantee from a AAA-rated guarantor.
• Servicer: The servicer of the pool must hold a minimum rating of AA-. If the original servicer’s rating falls below this threshold, a replacement servicer with at least an AA- rating must be appointed.

To conclude, this transaction effectively addresses various concerns related to the tenure of the securities, the negative carry associated with upfront cash collateral placement, and the need for a backup servicer. The involvement of a prominent bank in such a significant transaction underscores the relevance of securitisation for banks as originators. Market insights indicate that other banks are now exploring similar opportunities, which could serve as a strong catalyst for the growth of the securitisation market in India.

^[1] India Ratings and Research: Credit Rating and Research Agency India

^[2] ICICI Bank carries out largest securitisation deal – The Economic Times (indiatimes.com)

^[3] HDFC Bank To Sell Over Rs 9,000 Crore Car Loans To Manage Credit-Deposit Ratio (ndtvprofit.com)