Covid cases surge may impact NBFCs' fund raising via securitisation: Report

Fears of stricter lockdown amid coronavirus may affect asset quality of retail loans, thereby impacting the fund-raising ability of housing finance and NBFCs through the securitisation route

Fears of stricter lockdown amid the second wave of coronavirus infections may affect asset quality of retail loans, thereby impacting the fund-raising ability of housing finance and non-banking finance companies through the securitisation route, according to a report.

Securitisation is the process of pooling and repackaging homogenous illiquid financial assets into marketable securities that can be sold to investors.

Securitisation volume, which stood at Rs 85,000-90,000 crore during the financial year 2020-21, is expected to rise by 40-50 per cent year-on-year in the current fiscal (2021-22), Icra Ratings said in a report.

NBFCs and HFCs securitised volume stood at Rs 40,000 crore of their loans assets in the fourth quarter of fiscal 2020-21, similar to the corresponding quarter of FY2019-20, it added.

According to the agency's vice president and head (Structured Finance Ratings) Abhishek Dafria, despite the healthy activity seen in the securitisation market in Q4 FY2021, the rising COVID-19 cases may again create uncertainty among the investors.

"An unabated increase in the COVID cases is likely to bring about fears of harsher lockdowns, which could impact the asset quality of retail loans especially for unsecured loans such as in the microfinance sector. This, in turn, would impact the fund-raising ability of the NBFCs and HFCs through securitisation of their assets," Dafria said.

Successful implementation of the vaccination programme and the ability of government agencies to arrest the rising infections would remain critical in the near term, he added.

Due to the COVID-19 pandemic and resultant nationwide lockdown, securitisation volumes had seen an unprecedented fall in H1 FY2021 after two successive years (i.e. FY2019 and FY2020) of healthy volumes close to Rs 2 lakh crore each.

As the economic activities gradually resumed and loan disbursements gained momentum, even reaching pre-COVID levels for some NBFCs, the securitisation market saw a healthy uptick in volumes during H2 FY2021, the report said.

For FY2021, securitisation through Direct Assignment (DA) transactions (bilateral assignment of a pool of retail loans from one entity to another) accounted for about two-thirds of total annual volumes.

The balance one-third is through Pass-Through Certificate (PTC) transactions (loans are sold to an SPV which issues PTCs).

During FY2021, securitisation of mortgage-backed loans and gold loans found favour with investors, primarily due to the secured nature of the underlying loans, the report said.

On the other hand, volumes dropped for unsecured loans due to the higher risk perception, it said.

The agency's Assistant Vice President Sachin Joglekar said the increased securitisation volumes in Q4 FY2021 were aided by investors' confidence due to improved collection efficiencies and also on account of funding requirement of originators as they restarted retail loan disbursements.

"In the event that the new wave of COVID-19 cases does not cause any major economic disruption, we expect annual securitisation volumes to increase by 40-50 per cent in FY2022 compared to FY2021," Joglekar said.