Tight liquidity conditions and concerns over credit quality due to the economic slowdown have hit Indian structured finance (SF) issuances, including securitisation activity, in 2008-09.
The volume in the SF market declined by 18 per cent to Rs 52,000 crore in 2008-09 from Rs 63,700 crore a year ago, according to rating agency ICRA.
“Volumes were down especially in the second half (September 2008-March 2009) due to tight liquidity conditions and credit concerns over some sectors such as real estate and non banking finance companies (NBFCs),” said Kalpesh Gada, head of ICRA’s structured finance products.
Structured finance is a generic term for financial instruments that are devised for funding on the basis of identifiable assets rather than the credit standing of the entity concerned. It includes securitisation and various forms of lending, where the cash flow of the entity is trapped at source to pay off the lender.
According to an ICRA report titled “Update on Indian Structured Finance Market”, number of transactions were also down by 30 per cent over the previous financial year. Securitisation, including rated bilateral assignments of retail assets (asset backed securitisation and residential mortgage backed securitisation), saw a 47 per cent drop in volume.
The share of loan selloffs (securitisation of individual corporate loans) in the total securitisation activity rose to around 68 per cent in 2008-09, higher than the 50 per cent share it had during the previous year.
Until the first half of FY09, the Indian structured finance market was not severely impacted by the global credit crisis, largely because of the absence of transactions involving complex derivatives, revolving structures and credit default swaps.
Low structural complexity and leverage levels relative to that in typical transactions in developed markets as well as the fairly stable performance of the underlying assets insulated Indian investors from the widespread multi-notch downgrades of structured finance papers overseas.
However, tight liquidity conditions during the third quarter of FY09 led to significant redemption pressure on mutual funds. In that scenario, the relative illiquidity and lack of market depth for structured finance papers made their impact felt. This along with rising concern over the underlying credit quality caused investor interest in structured papers to decline, it added.
