After 20% drop in first half, securitisation rebounds 120% in Q3

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Securitisation volume put a two-quarter drag behind to script a smart turnaround in the fiscal third quarter, taking the nine-month tally up 7 percent on-year to Rs 59,000 crore. The volume had shrunk 20 percent in the first half due to uncertainty over the applicability of Goods and Services Tax (GST) on securitisation transactions. However, the market reversed the slide once the concerns on tax incidence abated. Clarity emerged after the originators sought the opinion of independent market participants such as accounting and auditing firms.

In the third quarter, transaction volume rocketed 120 percent on-year, aided by a low base – volume in the third quarter of fiscal 2017 had slipped to ₹10,000 crore following demonetisation.

Two major factors drove the surge -- first, a spurt in demand for non-priority sector (non-Priority Sector Lending) assets from banks, mutual funds and treasuries of non-banking finance companies (NBFCs). Incidentally, approximately 70 percent of the overall non-PSL volume is mortgage backed securities. The second factor was a 26 percent jump in direct assignment (DA) volume to ₹33,000 crore, from ₹26,000 crore.

Demand for non-PSL asset securitisation supports volumes…
CRISIL estimates the proportion of PSL securitisation, which has accounted for three-fourths of the market historically, to have shrunk to around 55 percent in the first nine months of the current fiscal.

In the non-PSL segment, mortgages (primarily home loans of higher ticket sizes that do not qualify as PSL) remain the preferred asset class – accounting for approximately 70 percent of the overall non-PSL volume – though receivables backed by car loans, two-wheeler loans and consumer loans are increasingly catching the fancy of investors. Public sector banks through the DA route, and mutual funds and NBFC treasuries through pass-through certificates (PTCs), are the major investors in non-PSL assets.

For large originators, non-PSL asset-backed PTCs were issued at coupons in the range of 7.5-8 percent, or 100-150 basis points more than for PSL asset-backed instruments. For smaller originators, PTC yields were upwards of 10%.

… even as PSLCs eat into PSL securitisation demand  
PSL securitisation, which has traditionally been the driver of securitisation volumes, shrank to approximately 55 percent due to increasing preference for priority sector lending certificates (PSLCs). Traded volume in PSLCs sizzled between April and December 2017, rising to ₹126,000 crore compared with ₹49,500 crore for the whole of last fiscal. Ease of purchase and absence of risk transfer make PSLCs an attractive alternative to securitisation for meeting PSL targets.

CRISIL believes that apart from the two main distinguishing characteristics of ease of operation and absence of risk transfer, the key to increase in PSLCs is low cost of acquisition. The cost of acquisition of PSLCs has been coming down over time with banks’ increasing familiarity with the product. The average cost of acquisition fell below 1 percent in the third quarter of the fiscal as compared to over 2 percent seen in the past.

Nonetheless, banks are expected to continue tapping the securitisation market to meet their PSL requirements, albeit to a lesser extent, as securitised assets will remain on the books for a longer period and generate income. PSLCs, on the other hand, expire at the end of each fiscal and add to the expenses of the investing bank. The ‘expense’ nature of PSLC investments, together with the volatility in their pricing, could discourage banks from depending exclusively on them. That’s why PSL securitisation will also continue to see demand.

DAs were the flavour of the quarter
In the first nine months of fiscal 2018, DA transaction volume witnessed robust growth – at ₹33,000 crore – driven by banks’ quest for retail credit growth. Overall, DA transactions accounted for 56 percent of the total transaction in the nine months, compared with 53 percent for the whole fiscal 2017. As in the past years, demand from public sector banks for mortgage assets to boost their loan book remained the driver of the market.

However, after growing by around 74 percent and reaching a decadal high of ₹42,800 crore in fiscal 2017, PTC volumes de-grew on a year-on-year basis this fiscal as mortgage players flocked to the DA market. For the first nine months, PTC transaction volume is estimated at ₹25,600 crore, lower than ₹28,700 crore estimated for the corresponding period last year.

Acceptability of microfinance assets on the rise; demand for vehicles and mortgages continue

Mortgage-backed securities (MBS) accounted for about 46% (₹27,000 crore) of the market this fiscal.

Among asset-backed securities (ABS), which are 54 percent of the market, vehicles – including commercial vehicles, cars and two-wheelers – account for 43 percent. The microfinance (MFI) sector accounts for about 9.5 percent of the market, still well below the 15 percent seen pre-demonetisation. However, investor confidence has returned, as evidenced by a 57 percent quarter-on-quarter growth in MFI securitisation volumes in the third quarter. With the asset quality parameters stabilising, MFI securitisation volumes would continue the uptrend.

Overall, CRISIL believes the dynamics of India’s securitisation market are changing. With participation by mutual funds and non-bank treasuries rising, newer asset classes and multi-tranche structures are making their presence felt. In a break with past years, demand for non-PSL assets will be the driver of securitisation market growth going forward. Additionally, CRISIL expects the growth momentum of the third quarter to continue into the last quarter of the fiscal.

By Krishnan Sitaraman, Senior Director, CRISIL Ratings 

The thoughts and opinions shared here are of the author.