Securitizations Provide Long-Term Funding Option for India- Moody's Structured Thinking

Securitization volumes in India increased by 29% year-on-year to INR490 billion in the fiscal year ended 31 March 2014 (FY2014). However, issuance levels have been volatile in recent years, owing to regulatory and taxation considerations, which have shaped the extent to which originators and investors have been motivated to tap into the securitization market.

Since Prime Minister Narendra Modi came to power in May 2014, he has pursued an economic growth agenda built around the construction of housing, cities and infrastructure. Consequently, there has been a renewed focus on securitizations as a source of long-term funding for the economy.

However, while securitizations can provide real estate developers, project sponsors and retail loan providers with the funds they need to finance urbanization projects, construction and housing, regulatory and tax issues will continue to play a significant role in shaping the development of India's securitization market.

For instance, the introduction of a distribution tax on trust income in 2013 had the effect of reining in investor demand for trust-based securitization transactions.

On the other hand, various regulations introduced over the past three years have paved the way for banks and non-bank financial companies (NBFCs) to tap into the securitization market for funds. For example, the Reserve Bank of India (RBI) has issued guidelines on the treatment of credit enhancement, which in turn have provided a yardstick for originators to assess the overall economics of transactions. These guidelines are important for a dual-structure market like India, where originators can choose between a trust-based special purpose vehicle that issues pass through certificates (PTCS), or a bilateral direct assignment (DA) structure.

The Indian securitization market is dominated by three main asset classes: auto loan asset backed securities (ABS), residential mortgage backed securities (RMBS) and micro loan ABS.

India's commercial mortgage backed securities (CMBS) market is also emerging, with three deals concluded in 2014.

In terms of the performance of the various asset classes:

The performance of more recent vintages of commercial vehicle loan ABS - the key auto loan ABS segment in India - has been weaker than those originated between 2009 and 2011, owing to a stressed operating environment for transport operators. The performance of pools originated in the 2012 calendar year was good in the initial months, but deteriorated, particularly 20 months post securitization. As for pools originated in CY2013 and CY2014, their initial performance has been weak.

RMBS pools have performed strongly, displaying high collection efficiency ratios and low delinquencies. However, RMBS loans from certain regions exhibit higher delinquency rates than others; and

Micro loan ABS performance has been robust, with the majority of transactions exhibiting a zero delinquency rate.

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