Securitisation market lose steam, volume may dip further

KOLKATA: Securitisation market is shrinking every passing year and the volume may plunge further following changes in regulation concerning the market, rating company ICRA said Wednesday.

The fresh issuance volume saw 40% drop last year over the previous fiscal to Rs 17,200 crore which is less than half the quantum securitized in FY12.
Securitization is a process of pooling various types of contractual debt and selling their related cash flows to third party investors as securities.

In India, securitisation deals are largely driven by banks’ need to meet priority sector lending targets. Banks with gaps in priority lending are allowed to invest in pass through certificates wherein underlying loans are priority sector-compliant. Banks can also purchase priority sector loan receivable pools from other lenders directly to meet the gap which is known as direct assignment.

ICRA argued the securitisation market may shrink further as Reserve Bank of India has widened the priority sector definition for banks making meeting the target easier like never before.

Loan categories such as medium enterprises, social infrastructure and renewable energy will now qualify as priority sector lending “Banks may find it easier to meet the targets on their own,” said Kalpesh Gada, head of structured finance at ICRA.

The distinction between direct and indirect agriculture has been removed. Funds parked in Rural Infrastructure Development Fund placed with the National Bank for Agriculture & Rural Development will continue to qualify for priority sector benefit.

However, the appetite of foreign banks for meeting their target for securitised paper may increase in a phased manner, which may offset the impact on the overall securitisation volumes to a certain extent.

During FY15, the volume of asset-backed securitisation declined by 30%, residential mortgage-backed securitisation issuance shrunk by over 80% compared to the previous year.

The direct assignment market is relatively more resilient than the PTCs, with interest from public sector banks in purchasing priority loan assets likely to continue, so long as prospects for corporate credit growth remain muted.

ICRA said the way the securitisation or direct assignment market evolves in FY16 will depend on factors like the ability of the banks to meet priority sector lending 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.