The scare of liquidity erosion and recovery in overall volumes to the pre-Covid level are some of the concerns facing India’s burgeoning asset securitisation market. Vivriti caught up with Abhishek Dafria, Vice President & Group Head of Structured Finance at ICRA Limited, to seek views on the concerns and the factors that are shaping up the market.
Q. There is a visible asymmetry in India’s asset securitisation market with respect to the exposure of small and medium players in sectors like CVs, MFI, etc. How is that asymmetry playing out currently?
Abhishek: The asymmetry would continue. The market had grown in 2019 and 2020 but got disrupted due to Covid. In this period, it has only been the larger players that, at least in terms of volumes, have been carrying out securitisation of big-size pools. The asymmetry with respect to the weaker rated entities is true even now.
The market in itself lacks depth. So, you will mainly have investors looking for AA- and AAA-rated pools as these ratings are normally preferred on the PTC side. They would not prefer BB- or BBB-rated category on the Senior Tranche. Again, smaller entities would typically be the ones with a lower to medium size portfolio and hence their funding needs would also be lower. So, the percentage of securitisation of smaller players on the overall volume would also be lower. About 75% of the volume of securitisation is undertaken by entities with AA-category and AAA ratings.
Q. Will the current macroeconomic conditions make the market asymmetry even worse?
Abhishek: It’s difficult to say whether it will make it worse. The overall driver would be the growth in credit demand in the NBFC space and, based on that, the funding requirement of all sorts of players would increase. If the credit demand remains buoyant, one would still see growth in overall volumes across the rating categories because we are anyway sitting with a lower base due to the Covid impact in the last two years. But if these macro factors lead to subdued credit demand, then it will impact all the entities in terms of volumes. But the preference would still be there for higher-rated players and the asymmetry is not expected to go away anytime soon.
Q. Issuers at the lower end of the rating scale lack due access to the market as their originator volumes are way lower than AAA-rated issuances. Given this scenario, would the price discovery of securities at the lower end improve if the market is flushed with liquidity? Hence, do you think due to the gradual tightening by RBI, the demand for such issuances could get impacted?
Abhishek: Price discovery would improve if the instruments were either listed or there is a secondary market where trading happens regularly. Both are not the cases for securitisation. The pricing for PTCs at present is linked to the demand-supply in the market and the relationship between the two parties – investors and originators. For price discovery, the secondary market needs to open up, which would require a larger base of investors coming into the market who are willing to buy out these instruments based on their risk assessment and yield perception.
The market is not exactly driven by liquidity but largely by the need of the originators to raise funds and the willingness of the investors to buy out these pools. Banks are the key investors. The drying liquidity could, in fact, boost securitisation because lot of NBFCs with healthy liquidity are now seeing an increase in disbursements and they would relatively carry lower liquidity on the balance sheet compared to the Covid period. Hence, due to central bank’s actions to suck out liquidity, their funding needs would in fact go up and they would be even more prompted to sell down their pools in the market. From the banks’ side, it’s a funding tool, where either they lend on the balance sheet or look at PTCs and DAs. So, the drying up of liquidity wouldn’t negatively impact securitisation.
Q. Securitisation pools based on CV loans have depicted stable collection performance historically despite events like the demonetisation and GST implementation in India. Now, a significant rise in fuel prices could cause difficulty for the vehicle operators to pass on the price hike to customers, leading to margin erosion and higher delinquencies. In such a scenario, do you think CV pools could get affected or show similar resilience as it did historically?
Abhishek: We have seen a few months of elevated crude prices. In this period, the collection efficiencies (CE) of CV pools have remained fairly manageable. In Apr 2022, the CE was close to 100% in the rated pool, in March it was above 100%, including OD collection. It is estimated to remain at similar levels in this scenario. So, we do not expect any material deterioration in terms of collection. Further, since the base for the CV industry had gone down due to Covid, the demand should actually go up as activities pick up. Hence, the ability of the vehicle owners to pass on the fuel prices would actually be high. There would not be any material changes in asset quality due to the fuel price hike for now. Its difficult to say what would happen in the long term. But the Government has also taken some steps to correct fuel prices such as the cut in excise duty, which would have some positive bearing.
Q. Despite accounting for a meager ~2% of securitisation volume in India, pools based on two-wheeler loans are expected to be the emerging asset class in the market once the secondary market valuations of the vehicles and other nuances are recognized. The market has potential as about 75% of two-wheelers in the country are purchased using loans. How is the 2-wheeler ABS market shaping up currently?
Abhishek: There are limited 2-wheeler financiers who use securitisation as one of the funding tools. There is not any major change in the market shape or size lately. Basically, it is driven by a few entities about how much they would be disbursing and how much they would use securitisation as one of the ways to raise money. If the market grows, more entities will look at securitisation.
Q. How the rising interest rates expect to impact the MFI pools? Do you think RBI’s removal of interest rate ceiling on loans offered by NBFC-MFIs would help?
Abhishek: The RBI regulation should help as most MFIs have started increasing borrowing rates after the regulation came into force. Going forward, as far as the new pools are concerned, it will have a bearing on the Excess Interest Spread (EIS) available in the transaction since pool yield would go up, though the benefit may be muted if the PTC yields also start increasing.
Q. MFI securitisation volumes, which hit ~INR 29,000 crores in FY20, are yet to recover to pre-Covid levels despite showing significant improvements lately. Given the current macroeconomic conditions, when are the volumes expected to recover to the pre-pandemic level?
Abhishek: Q1 is not the period to assess the volume as a lot of transactions happens in Q4 due to PSL requirements similar to the last year. Going forward, it will go to the pre-Covid level. In the fourth quarter of FY22 and thereafter, we have seen the recovery in volumes have been better compared to FY21. We are witnessing DAs and PTCs pick up meaningfully since Q4, which is expected to continue. As disbursements are picking up for many players, securitisation volumes are also expected to go up.
Q. Coming to the MSME pools, the liquidity cushions of the MSME sector have eroded due to the prolonged effect of the pandemic and much of its survival has remained dependent on govt support like the Emergency Credit Line Guarantee Scheme (ECLGS) scheme, which has been extended till Mar 2023. What do you think will happen to the performance of the pools once the govt schemes like that wind-up? Can the sector build up inherent strength to continue without the support?
Abhishek: The overall economic activity has improved. In addition, most of the contracts mainly in our post-Covid pools are contracts that have not availed ECLGS loans. These are cherry-picked contracts, which are not restructured, not availed moratorium or ECLGS. Hence, concerns about the pools would relatively be lower. The inherent strength is there for the securitised pools.
Q. What is your view on other asset classes in India’s securitisation market?
Abhishek: Consumer loans is probably one of the asset classes where securitisation could pick up. But as of now, there are very few entities (like some fintech entities) who carry this out. We are seeing good traction in the personal loan space too where the securitisation volumes could witness some meaningful growth.