Securitisation volume crossed Rs 26,000 crore in the third quarter of this fiscal – higher than the cumulative Rs 22,000 crore logged in the first half – as more originators entered the market; and, mutual funds, which had by and large stayed away in the first half, started investing in new issuances.

This takes the total volume for the first nine months of this fiscal to ~Rs 48,000 crore, though that is still way behind fiscals 2018 (~Rs 60,000 crore), 2019 (~Rs 145,000 crore) and 2020 (~Rs 152,000 crore).

CRISIL Ratings had in its previous press release¹ noted the return of interest in the securitisation market, especially in September 2020, as the moratorium period for underlying assets ended.

The stability in pool collections in the post-moratorium period has been a sign of confidence in securitisation for investors. Consequently, mutual funds have joined banks, insurance companies, and high net-worth individuals (HNIs) as investors in securitisation transactions, albeit gradually.

Says Krishnan Sitaraman, Senior Director, CRISIL Ratings Ltd, “Disbursement activity at non-banking financial companies (NBFCs)² has resumed in sync with the uptick in economic activity. With a gradual increase in investor appetite and amenable market conditions in the form of a lower interest rate environment, NBFCs have again started raising incremental funds through securitisation.”

Asset-backed securities (ABS) continued to dominate this fiscal. Commercial vehicle, gold, microfinance, tractor and unsecured personal loans comprised over two-thirds of the volume securitised, while mortgage-backed securitisation (MBS) transactions with underlying home loans and loans against property (see Chart 1 in Annexure), accounted for the balance. As much as 63% of the volume securitised this fiscal has been through the direct assignment (DA) route, including those under the government-sponsored Partial Credit Guarantee scheme (see Chart 2 in Annexure).

Issuance of innovative structured products, such as replenishing securitisations and covered bonds, crossed 2% of the transaction volume in the third quarter, indicating greater acceptance by the market, especially HNIs. The underlying assets to these issuances have been almost entirely non-mortgage, including gold, vehicle and small business loans.

Rising collection efficiency in securitised pools with underlying microfinance loans has increased investors’ appetite for fresh exposures in the sector. Funds mobilised by microfinance entities through securitisation in the third quarter tripled from the first half of the fiscal. However, construction equipment-, vehicle- and tractor-backed pools constituted over half of ABS issuances.

A return of business activity to pre-pandemic levels would augment the interest of investor groups, spurring demand for good-quality securitised paper. As economic activity rebounds, NBFCs are expected to shift their focus to incremental disbursements and consider securitisation as a key funding source. Consequently, if collection efficiencies continue to be steady, securitisation volumes could spurt in the fourth quarter and, possibly, equal or even surpass cumulative issuance witnessed in the first three quarters of the current fiscal.

Says Rohit Inamdar, Senior Director, CRISIL Ratings Ltd, “Once lenders refocus on portfolio growth, they may choose to tap into securitisation for meeting their incremental funding needs. Investors, reassured by improved collection ratios, would likely drive the market. Traction in securitisation volumes will however be dependent on continued improvement in collection efficiency and stabilisation of the business environment for NBFCs.”

¹ https://crisil.com/en/home/our-businesses/ratings/Newsletters/2020/november/other-sectors/securitisation-dives-80percent-in-the-first-half-on-moratorium-blues.html
² NBFCs include housing finance companies and microfinance institutions