Banks drive Securitisation volumes to all-time high

– Vinod Kothari, vinod@vinodkothari.com 

The release of securitisation data by the rating agencies shows that securitisation volumes in FY 25 saw a 30% increase, taking the volumes to a new watermark of volumes reaching ₹ 2,68,000 crores.

Inherent in this growth a completely new feature – banks entering as securitisation issuers. Our analysis shows that there are at least 4 banks which have originated volumes of nearly ₹26,800  crores, led by HDFC Bank with issuances adding up to almost ₹21,400 crores. Obviously, the above data of originations by banks were entirely securitisation notes or PTCs, as we would not expect banks (with the exception of small finance banks) to have done transfer of loan exposures (TLE) or so-called DA transactions.

The beginning of a new normal  

While banks are common issuers elsewhere in the world, banks have shunned securitisation issuance in the past and mostly remained limited to investing in securitisation notes and being on the buyside of loan transfer transactions. 

At the start of FY 2024, a notable development in the securitisation market was observed with the entry of banks. While this was mostly dominated by Small Finance Banks, there were certain private sector banks in the space as well. Bank-originated volumes grew to about ₹10,000 crore in FY 2024, up from ₹6,600 crore in FY 2023. In our publication last year, Vikas Path: The Securitised Path to Financial Inclusion, we commented that banks are likely to be motivated to enter securitisation markets in a big way in FY 2025. Relevant extract of the same is as follows:

“Going forward, will there be pressure on banks to use securitisation for refinancing themselves?

There are several factors that need to be evaluated in this context:

• First, the capital adequacy ratios for most banks are comfortable – the RBI’s Financial Stability Report for December 2023 states that the CAR for all scheduled commercial banks was at 16.8% as of Sept., 2023, though lower than the number as on March 23. However, risk weights were recently increased on consumer lending and exposure to NBFCs. Further, there is a proposal to increase provisioning in case of project loans. The proposal to introduce expected credit losses has been pending for some time. Once implemented, it will cause significant increase in loan loss allowance, putting pressure on capital adequacy.
• However, credit deposit ratio (CD ratio) has been increasing for most of the larger banks. This is due to sharp credit growth – there have already been several noises about the increasing levels of personal loans and consumer credit in the country
• As credit continues to grow, and deposit growth may be sluggish due to increasing popularity of alternative retail investment products, banks will be left with very little options but to fund their asset buildup by opting for securitisation. Banks are also likely to look at the on-balance sheet advantage of securitisation – that while it offers capital relief, it does not force assets to be moved off the balance sheet. In fact, most Indian transactions stay on the balance sheet. Therefore, there is liquidity, and yet no contraction on the balance sheet size.

These factors may motivate banks to enter securitisation markets in FY 2025.”

Further, in Jan 2025, our write up Secure with Securitisation: Global Volumes Expected to Rise in 2025 discussed how the securitisation volumes surged about 27% on-year-on-year to ₹ 1.78 lakh crore in the first nine months of FY 24-25, supported by large issuances from private sector banks. In the third quarter alone, issuances touched ₹ 63,000 crore with private sector banks contributing to 28% of this (HDFC bank alone securitised new car loans by issuing PTCs valued at just over ₹12,700 crore). However, originations by NBFCs were only up by 5%. The market also saw 15 first time NBFC issuers, bringing the total number of originators to 152, compared with 136 in the last financial year. 

Our write up Indian securitisation enters a new phase: Banks originate with a bang also discussed how banks are now re-entering the market as originators. Earlier, after the GFC, banks shifted from being originators to becoming investors in securitised assets. This was however a stark contrast to the situation elsewhere in the world, where the issuances are primarily done by banks.

The issuance in FY 2025 is merely the start of a new normal: banks are expected to be dominant players in time to come. Capital relief as a motivation may have a strong appeal for banks, even though securitisation remains burdened with a lot of complicated rules.

Fig 1: Securitisation- A Cart loaded with regulations

The data discussed above does not include co-lending, which seems to be quite popular, though the recent stress in microfinance and personal lending seems to have slowed the co-lending vehicle. Even though non-PSL co-lending currently seems to be going with “write your own rule book”, the RBI has taken note of the same, as the 9th April 2025 announcements of the RBI include a new proposed framework of rules for non-PSL co–lending. Hence, the cart is not going to be an empty one in time to come.

Fig 2: An empty cart waiting to get the load of new rules

Direct Assignments versus Securitisation

We have commented extensively earlier that transfer of loan exposures is not captured as a part of securitisation transactions internationally; however, in India, the so-called DA business has been an alternative to securitisation. Hence, Indian market data captures DA as a securitisation twin.

This year, like in the previous FY, securitisation notes or PTCs have taken nearly half of the last year’s volumes. Going forward, we expect more of securitisation notes, as bank issuances will naturally be focused on securitisation.

RMBS still remains a goal post. RMBS Development Company, formed with the agenda of promoting home loan securitisations, should soon be working to make an impact on the otherwise slow moving part of securitisation.

Structural Innovations

The otherwise dull and drab drawing board saw several structural innovations. There were time tranches, separation of liquidity and credit support, and even some interesting features such as two layers of cash collateral. Given the fact that the issuers of this year are strong and daring, their structures are obviously not dictated either by typecast investor templates, or by the placement agencies. Going forward, we see more structural innovations, in particular, IO strips being available for investors.

Headwinds in future?

Personal finance and microfinance are already seeing rising default rates. Lenders are reportedly moving towards the so-called “secured lending”, where security may be more of a sense of being secured, than the value or realisability of the collateral. As global trade turmoil makes its wide-spread impact, there may be challenging times for financial sector entities, which may show on the performance of loan pools too.

Another very significant risk on which long term loan portfolios may be sitting is climate risk. Several India states face significant risk of climate-induced dislocation of population. The risk of extreme weather changes is also quite evident. These changes may impact long-term loan portfolios, and the build up of the impact may be faster than anyone expects. 

In general, we all need to be prepared for major external correlation risks. These risks affect portfolios far more than loan level correlations do, and when they do, credit support levels quickly get eaten up.

Related resources –

• Vikas Path: The Securitised Path to Financial Inclusion
• Secure with Securitisation: Global Volumes Expected to Rise in 2025
• Indian securitisation enters a new phase: Banks originate with a bang