Securitisation market gathers steam

Issuances of low-rated ones rise, preference shifts to asset and mortgage-backed securities from corporate loans

After a lull, the securitisation market in India is showing revival signs.

Volumes touched Rs 70,000 crore in 2015-16, an increase of 60 per cent from Rs 44,000 crore in 2014-15. This is the first time since 2007-08 that volumes have reached this level.

But the structure of the market appears to have changed. Three broad trends emerge. First, a marked shift in favour of asset- and mortgage-backed securities, away from the corporate loan segment.

Second, demand is being largely driven by public sector banks and foreign banks. In the previous cycle, mutual fund houses were major buyers. Third, there has been a marked decline in the issuance of high-rated securities, with low-rated ones now in greater circulation.

During the mid-2000s, when the market in India was gathering steam, corporate loan securitisation accounted for the lion's share of volumes. In 2008-09, this segment alone accounted for nearly three-fourths of the market. Deals in this segment have plummeted since. Asset-backed and mortgage-backed securities now account for roughly 99 per cent of the volume.

This shift largely reflects the trouble that banks are facing with the corporate loans' market. Hiving these loans off is going to be difficult in the current environment. Retail (to individual) loans, on the other hand, are considered a safer bet.

The sudden surge for retail securitisation products can be traced to the growing demand from public sector banks and foreign banks. With the corporate loan segment drying up, public sector banks (PSBs) are increasingly relying on securitisation deals to boost credit growth numbers.

PSBs are increasingly getting involved in what are called direct assignments - bilateral transactions where there is a direct sale of a selected loan pool by the originator to the purchaser. As these are recorded as loans and advances in the books of the purchaser, PSBs have taken over these asset pools to shore up their flagging credit growth numbers.

"Participating in direct assignment transactions is a good option for them (PSBs)," says Krishnan Sitaraman, senior director, CRISIL Ratings. The agency estimates at least half the volume was purchases made by PSBs. These accounted for nearly a fifth of the retail loan growth of commercial banks in the past financial year.

Foreign banks have also emerged as major buyers in this market, as the entities are looking to meet their priority sector lending targets.

According to revised guidelines, priority sector lending targets for foreign banks have been increased to 34 per cent from the earlier 32 per cent. Thus, products based on micro finance loans, loans to small commercial vehicle operators and tractor loans, part of priority sector lending, are increasingly in demand.

"The revision in priority sector lending targets for foreign banks is likely to drive demand over the coming years," says Dipanshu Rustagi, analyst at Moody's Investors Service.

Experts say major players in the micro finance space are SKS and Janalakshmi; in asset-backed securities, Sri Ram Transport and Cholamandalam. In mortgages, Dewan Housing Finance Corporation.

This increase in demand from banks, public sector and foreign, is relatively new. During the mid-2,000s, mutual funds drove up demand. This time, "They have stayed out on account of their concerns with taxation norms," says Sitaraman.

While the recent Budget did clarify some issues relating to taxation, experts say unless the issue of past notices is resolved - the matter is awaiting court judgement - demand from mutual funds is unlikely to firm up.

A troubling aspect of the recent surge is the sharp increase in lower-rated papers. According to ICRA, the share of non-AAA-rated pass through certificates increased from 50 per cent earlier to 60 per cent in 2015-16. Most BBB-rated transactions were in the MFI space, whose share has risen to 36 per cent in 2015-16 from 22 per cent in 2013-14. This increase could explain why the loan portfolio of MFIs grew 84 per cent to Rs 53,233 crore at the end of March, as was reported by some newspapers.

Lower-rated securities offer higher yields to compensate for the greater probability of default. Nevertheless, it is surprising to see the surge in demand in the current environment. Perhaps the combination of the desire to expand loan portfolios, lower expected default rates in retail loans and the appeal of higher yields is driving up demand among banks. On the flip side, the higher risk of default has been transferred to banks.