Ind-Ra: Non-PSL Securitisation Likely to Drive Growth of Securitisation Market

India Ratings and Research (Ind-Ra) believes emergence of priority sector lending certificates and many new retail asset classes will gradually drive the securitisation market to grow beyond priority sector lending (PSL) securitisation. The overall pass-through certificate (PTC) securitisation volume declined nearly 20% yoy to INR 0.34 trillion in FY18, while priority sector lending certificate trading volume surged to INR1.84 trillion (FY17: INR0.50 trillion).

Non-PSL Loans Held by Many Active Securitisation Issuers: As per Ind-Ra's estimates, about INR0.50 trillion of the non-PSL loans originated by the top 10 active securitisation issuers could become the initial growth driver of non-PSL securitisation. A large portion of these loans cannot be categorised as PSL as they exceed the permissible interest rate limit. Securitisation of these high yielding non-PSL loans could become a potential source of liquidity and funding for the issuers. The other set of non-PSL loans (example car loans) comprises of asset classes which do not fall under the PSL classification. Investors, in the past, have shown interest in PTCs backed by these loans. The emergence of new age non-banking financial companies and Fintechs, which typically operate at a higher interest rate, could become another growth area for securitisation in the coming years.

Non-PSL Securitisation - Effective Portfolio Risk Management Tool: Securitisation of non-PSL loans will provide an alternative source of funding and could help lenders tide over tight liquidity situation. It is also likely to help an issuer manage portfolio level risks such as geographical concentration, asset-type concentration and borrower concentration in case of wholesale lending.

Challenges in NPSL Securitisation: While non-PSL securitisation may provide significant capital relief to a majority of the issuers, the underlying loans are likely to be riskier than a typical PSL loan in the same asset class. The increased risk in non-PSL loans warrants advanced analysis to accurately estimate the default rate of such loans, and accordingly size the credit enhancement. With limited available information in the public domain for securitisation and limited liquidity in the secondary market, investors in the non-PSL category may expect a premium over non-convertible debenture rate, despite similar or higher rating.

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