Sales of loan pools have become the main source of funds for non-bank lenders. Since the IL&FS crisis in September 2018, non-bank finance companies (NBFCs) and housing finance companies (HFCs) have together raised up to Rs 2.36 lakh crore through the sale of their loan assets, according to a note from the rating agency Icra.
This unprecedented increase in sales volumes reflects congestion in traditional on-balance sheet borrowing channels such as loans, bonds and commercial paper issues, the agency said.
“NBFCs and HFCs continue to rely heavily on securitization as a tool to raise funds, manage liquidity and correct any ALM (asset-liability management) mismatch. With public sector banks ordered to disburse funding of Rs 1 lakh crore under the partial credit guarantee program by February 2020, we believe the size of the securitization market would hit a record high, exceeding Rs 2 lakh crore for FY20, ”said Abhishek Dafria, vice president and head of structured finance rating, Icra.
According to Icra’s estimates, the volume of Transfer Certificate (PTC) transactions was around Rs 92,000 crore, while Direct Assignment (DA) transactions were much higher at 1.46 crore. of lakh Rs between October 2018 and September 2019.
DA volumes saw a 33% drop in the first half of 2020 to Rs 58,400 crore from Rs 87,450 crore in the second half of 2019, mainly due to the weakening of the credit profile of a few originators who were traditionally significant participants and assets, according to the report.
As a result, the share of mortgages in total volumes was also reduced to 30% of total volumes in S1FY20, compared to around 45-50% of total volumes in FY18 and FY19.
Within PTC, while commercial vehicle credits remain the most sought after. Small business loans saw the strongest recovery, accounting for 11% of PTC volumes in S1FY20. Within DA, gold lending gained popularity among buying banks and accounted for 10% of declining sales volumes in S1FY20.
The report highlighted a reduction in Priority Sector Lending (PSL) focused transactions in the PTC space over the past three to four fiscal years. The share of PSL certificates in PTC stood at 52% in S1FY20, compared to 88% in FY17, mainly due to a change in the investor base in PTC transactions.
While private banks were previously the primary category of investors seeking to acquire PSL assets through PTCs, in recent years NBFCs, foreign portfolio investors, high net worth individuals (HNIs) and insurance companies have also participated in the market lately. This latter group of investors has no particular interest in PSL assets. As a result, non-PSL asset segments, such as two-wheeler loans, small business loans and gold loans, are increasingly securitized, Icra said.