Securitisation market booms as shadow banks diversify funding sources

Sector is expected to grow further as credit demand grows, say senior executives

Securitisation volumes in financial year 2023-24 (FY24) are back to their record highs of Rs 1.9 trillion, last seen in the two financial years before the pandemic. But a closer look at the numbers tells you that this is despite the fact that HDFC Ltd is no more in this market after merging with HDFC Bank. The housing finance company accounted for 23 per cent of the FY23 volumes of Rs 1.8 trillion; and adjusted for this, growth is 27 per cent. In FY24, issuance diversity in securitisations was up at 165 originators logging 1,100 transactions in FY24 from 160 and 1,000 in FY23.

Securitisation is a process through which lenders sell the right to receive future payments from borrowers to a third party and obtain a consideration for it much before the actual maturity of the original loans. What is driving this surge in volumes?

“It is to a great extent a reflection of NBFCs’ (non-banking financial companies) diversification of funding avenues,” says Ajit Velonie, senior director, CRISIL Ratings. Last November, the Reserve Bank of India (RBI) upped the risk weights on bank exposures to NBFCs by 25 percentage points, and made clear they will have to diversify their funding sources rather than rely on bank finance.

Safe space

From all accounts, it appears NBFCs had read RBI’s ‘Financial Stability Report’ of June 2023 well. It had drawn attention to their personal loans growth: Up year-on-year by 31.3 per cent while that to industry grew slower by 12.7 per cent. During the last four-year period, the portfolio grew rapidly – at a compounded annual growth rate of more than 30 per cent; and its share of the book moved up to 31.3 per cent in March 2023. And even before the risk weight hike last November, the ‘Report on Trend and Progress of Banking in India’ (T&P: 2020-21) had given a hint on what could be in store. Bank credit growth had remained subdued, “… NBFCs have stepped up to fill this space… concerns have emerged about NBFCs’ asset quality.”

And in its T&P: 2022-23, Mint Road flagged the uptick in securtisation when it noted that “loan sales grew swiftly”. Lending institutions resort to loan sales for reasons ranging from liquidity management to rebalancing their exposures or strategic sales. And that “Banks have been a major participant in both the above segments (as both sellers of and investors in securitised pools)” but this is due to an entirely different reason which we will come to later on.

For Y S Chakravarti, managing director (MD) and chief executive officer (CEO) of Shriram Finance, “Ït (securitisation) brings in transparency as the portfolios are rated, and have to be performing”; and as in the case of NBFCs’ bonds “a lot will depend on the rating and business models”. CRISIL Ratings throws light on this.

Vehicle loan securitisation cornered the highest market share in FY24 (43 per cent versus 31 per cent in FY2023). Microfinance accounted for 16 per cent (15 per cent), the contribution of business loan securitisation more than doubled to 11 per cent (5 per cent) and personal loan securitisation was 5 per cent (4 per cent). “The volume mix is expected to gravitate towards these asset classes in FY25, given high expectations of credit growth and recent regulatory and corporate actions affecting gold loan and mortgage securitisation,” says Chakravarti.

Rajiv Sabharwal, MD & CEO of Tata Capital, has it that “it (securitisation) also helps in virtue signalling. It conveys to the market the quality of your portfolio. And when you approach the market (at a later date), investors have a better sense of the quality of your book”. While for Vimal Bhandari, MD & CEO, Arka Capital, “at another level, the appetite for NBFC-originated paper is also a reflection of the confidence in the credit quality of the underlying loans originated by them. This mutual benefit partnership is very welcome.”

Encouraging sign

Yet another data point is encouraging. Quarterly commercial paper (CP) issuances by NBFCs hit a four-and-a-half-year high of Rs 1.2 trillion in January-March 2024, a level last seen in July-September 2019 (even though this is still lower than the highs of Rs 3.1 trillion seen in July-September 2018).

It is not just NBFCs, but banks may also increasingly tap the securitisation route. Small finance banks and private banks have made an entry in recent quarters. Bank-originated volumes grew over 50 per cent to Rs 10,000 crore in FY24, compared to Rs 6,600 crore in FY23. IDFC Bank has done a transaction of around Rs 600 crore. “It's a huge securitisation market of about Rs 2 trillion, and there are opportunities for all kinds of players. We have done such transactions in the past well. The main benefit to us is that it frees up capital. It also brings down the credit-deposit ratio (CD ratio),” says Paritosh Mathura, head-corporate banking and treasury, IDFC Bank. The bank’s CD ratio is down to 98 per cent, down from 140 per cent five years ago. On an incremental basis, it is 76.2 per cent in FY24.

According to Vivek Iyer, partner, Grant Thornton Bharat, “With better than expected mosoons combined with the infrastructure focus of the government, we don’t see credit demand going down anytime soon”. Just how this plays on banks’ CD ratios has to be seen: Mint Road has apparently conveyed its views on the subject even as RBI Governor Shaktikanta Das is on record that it has not stipulated a particular level (CD ratio).

The current boom in securitisation appears to suggest that NBFCs have managed to traverse the regulatory changes following the blowouts at Infrastructure Leasing & Financial Services and Dewan Housing Finance Corporation (which now resides in Piramal Capital and Housing Finance). Plus, the changes brought forth by RBI’s four-layered scale-based regulatory framework for NBFCs. But the plot could still take a different turn if stress turns up in securitised portfolios, especially in the base-layer NBFCs (with asset size below Rs 1,000 crore.)

Regulatory moves from Mint Road are also awaited. In September 2023, RBI deputy governor Rajeshwar Rao in a speech (Credit Intermediation: Can regulations tango with markets?) noted, “Our framework on securitisation issued in 2021 carries a negative list restricting a few asset classes from being securitised. But this is not a fixed exclusion. We constantly monitor the growth and maturity of the market and are ready to take a well-thought-through call if some restricted assets could be securitised in the current environment.”