Securitization issuance volume declines marginally but bilateral assignments more than double during FY 14-ICRA Research

Issuance volume of rated transactions in the Indian securitisation market fell by 5% over the previous fiscal to Rs. 28,800 crore in FY143. The volume of securitisation of Asset-Backed Securitisation (ABS) declined by 14% while that of Residential Mortgage-Backed Securitisation (RMBS) increased by 75% (albeit on a small base) in FY14. The decline in securitisation volumes could largely be attributed to the new tax treatment, viz., the tax on distribution of income by the Trustee, introduced by the Union Budget 2013-14 which adversely impacted the post-tax yield for banks, the key investor set for these transactions. On the other hand, ICRA estimates that the volume of the bilateral retail loan pool assignments/ Direct Assignment (D. A.) transactions grew by 150% to around Rs. 20,000 crore in FY14. Thus, the combined value of retail loans assigned / securitized in FY14 was around Rs. 49,000 crore (29% growth over that of FY13). Securitisation of Commercial Vehicle (CV)/ Construction Equipment (CE) loans continued to dominate the ABS market followed by Microfinance, Tractor, SME and Car loans. The RMBS market, on the other hand, was a mix of both Home Loans and Loan against Property (LAP) contracts.

The issuance of the much awaited guidelines on the reset of credit enhancement in securitisation transactions was welcomed by market participants. The provision for the CE reset is expected to provide some benefit for the Originators in terms of lower effective cost of securitization and consequently improved profitability. While the new tax treatment was expected to open the path for mutual funds (MF) to invest in securitization transactions, the MF industry continued to stay away from the same owing to unresolved tax-related litigations on past transactions. In FY14, private sector and foreign banks continued to be the key investors in securitisation/ D.A. transactions, mainly driven by priority sector lending (PSL) motive. However, unlike the previous fiscal, FY14 also witnessed notable interest from public sector banks in D. A. transactions (both PSL and non-PSL), spurred by the intent to aggressively grow their retail loan book. ICRA also noted increased participation from some NBFCs, HNIs and PE firms (many of them being first time investors) in relatively lower rated and higher yielding paper, purely for commercial reasons. From the Originators' perspective, attractive pricing was the main motive for doing securitisation/ D. A. transactions followed by the associated benefits of capital relief (in some instances) and tenure-matched funding (more pronounced in the case of RMBS).

 

ICRA expects banks to continue to utilize the securitisation/ D. A. route to meet their shortfall in priority sector lending targets. However, the reliance on the D. A. route for acquiring PSL assets is expected to increase further unless there is a change in the PTC taxation regime. Overall, the way the securitisation / D.A. market evolves in FY15 will depend on factors like changes in regulatory norms pertaining to PSL classification, the ability of the banks to meet PSL targets on their own or through some alternate channels, regulatory clarification on taxation related issues, interest from public sector banks in acquiring retail assets and the pace of growth in loan book of the key Originators.

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