Securitization value in fiscal year 2023-24 (FY24) returned to an all-time high of Rs 1.9 trillion seen in the two pre-pandemic fiscal years. However, a closer look at the numbers reveals that this is despite HDFC Ltd no longer being present in this market after its merger with HDFC Bank. Housing finance companies accounted for 23% of the transaction volume of Rs 1.8 trillion in FY23. Adjusting for this, the growth rate is 27%. The diversity of issuances in securitizations in FY24 increased from 160 and 1,000 transactions in FY23 to 165 originators recording 1,100 transactions in FY24.
Securitization is the process by which a lender sells the right to receive future payments from a borrower to a third party, receiving consideration long before the original loan actually matures. What is causing this surge in volume?
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“This largely reflects the diversification of funding options for NBFCs (non-banking financial companies),” said Ajit Verony, senior director at CRISIL Ratings. In November last year, the Reserve Bank of India (RBI) had increased the risk weight of bank exposure to NBFCs by 25 percentage points, making it clear that there is a need to diversify funding sources instead of relying on bank loans.
safe space
By all accounts, NBFCs seem to have read the RBI's June 2023 'Financial Stability Report' carefully. Growth in personal loans has garnered attention, increasing by 31.3% year-on-year, while growth in corporate loans has slowed by 12.7%. Over the past four years, the portfolio has grown rapidly, with compound annual growth rates exceeding his 30%. And that percentage rose to 31.3% in March 2023. And even before the hike in risk weights in November last year, the 'Trends and Progress Report on Indian Banking Industry' (T&P: 2020-21), What's in store? Bank credit growth remains subdued and “…NBFCs are stepping up to fill this space…There are concerns about the asset quality of NBFCs.”
And Mintroad, in T&P: 2022-23, said “loan sales have grown rapidly” and warned of an increase in securitization. Lending institutions rely on loan sales for a variety of reasons, from liquidity management to exposure rebalancing and strategic sales. And while it states that “banks are major participants in both of the above segments (both as sellers and investors in securitization pools)”, this is for entirely different reasons, and about this will be explained later.
YS Chakravarti, Managing Director (MD) and CEO, Shriram Finance, said, “It (securitization) brings transparency as portfolios need to be rated and performance maintained. ” states. And as with NBFC bonds, “a lot depends on the rating and the business model.” CRISIL Ratings sheds light on this.
Auto loan securitization had the highest market share in FY2024 (43 percent in FY2023 and 31 percent in FY2023). Microfinance accounted for 16 percent (15 percent), business loan securitization more than doubled its contribution to 11 percent (5 percent) and personal loan securitization 5 percent (4 percent). “Given high expectations for credit growth and recent regulatory and corporate actions impacting gold loans and mortgage securitization, we expect the volume mix in FY25 to gravitate toward these asset classes.” says Chakravarti.
“It (securitization) also helps in virtue signaling,” says Rajiv Sabharwal, MD and CEO, Tata Capital. It tells the market about the quality of your portfolio. And when you approach the market (at a later date), investors will have a better idea of the quality of your book. Bimal Bhandari, MD and CEO, Arca Capital, said, “At another level, the demand for NBFC-derived paper reflects confidence in the creditworthiness of the underlying loans originated by NBFCs.'' There is,” he said. This mutually beneficial partnership is very welcome. ”
signs of encouragement
Yet another data point is reassuring. Quarterly commercial paper (CP) issuance by NBFCs reached a four-and-a-half-year high of Rs 1.2 trillion in January-March 2024, the highest level since July-September 2019. (Although this is below the all-time high of Rs. 3.1 trillion in July-September 2018).
Not just NBFCs, banks too are likely to increasingly take advantage of the securitization route. Small finance banks and private banks have entered the market in recent quarters. Bank-originated transaction volume increased by more than 50% to Rs 10,000 billion in FY24 compared to Rs 6,600 billion in FY23. IDFC Bank carried out transactions worth around Rs 600 crore. “This is a huge securitization market of around Rs 2 trillion and there are opportunities for all kinds of players. We have done such deals well in the past. The main benefits for us are: It frees up capital. Also, credit deposit ratio (CD ratio) will come down,” said Paritosh Mathura, head of corporate banking and treasury, IDFC Bank. The bank's CD ratio has fallen to 98% from 140% five years ago. On an incremental basis, it will be 76.2% in FY24.
“With the stronger-than-expected impact of Mosoon and the government's focus on infrastructure, we don't expect credit demand to decline anytime soon,” said Vivek Iyer, partner at Grant Thornton Bharat. It remains to be seen how this will affect banks' CD ratios. Despite Central Bank Governor Shaktikanta Das being on record as not prescribing a specific level (CD ratio), Mint Road is clearly giving its views on the issue.
The current securitization boom has seen NBFCs manage to weather regulatory changes following the collapse of Infrastructure Leasing & Financial Services and Dewan Housing Finance Corporation (now part of Piramal Capital & Housing Finance). It seems to suggest that. Moreover, the changes brought about by the RBI's four-tier size-based regulatory framework for NBFCs. However, if there is stress in the securitization portfolio, especially in the base tier NBFCs (with asset size below Rs 1,000 crore), the situation could take a much different turn.
Regulatory moves from Mint Road are also awaited. In September 2023, RBI Deputy Governor Rajeshwar Rao said in his speech (Credit Intermediation: Can Regulation be Harmonized with Markets?): “Our framework for securitization published in 2021 includes a negative list restricting the securitization of some asset classes. However, this is not a fixed exclusion. We are constantly monitoring growth and maturity and are open to thoughtful consideration of restricted asset securitization if it is possible in the current environment.”
