Securitisation Volume Dips in Q3, But Overall Growth Remains Positive

The securitisation market in India experienced a decline in volume during the third quarter (Q3) of the current fiscal year, with a 17 per cent year-on-year drop to Rs 38,000 crore from Rs 46,000 crore in the corresponding period of the previous year. However, despite this decline, the cumulative volume for the first nine months of the fiscal year showed a significant 20 per cent growth to Rs 1.4 lakh crore.

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Factors Behind the Q3 Decline

The primary reason for the decline in securitisation volume during Q3 is attributed to the exit of HDFC, a major player in the market, following its merger with its banking arm on July 1, 2022. This exit resulted in a substantial reduction in the overall volume of securitised assets.

Additionally, the Reserve Bank of India's (RBI) decision in November 2023 to increase the capital requirements for lending institutions towards consumer credit by 25 percentage points contributed to the decline. This regulatory change led to increased caution among lenders and originators, resulting in a slowdown in securitisation activity.

Positive Outlook for Q4 and Beyond

Despite the challenges faced in Q3, analysts and rating agencies remain optimistic about the future of the securitisation market in India. Crisil and Icra, two leading rating agencies, have projected continued growth momentum in the coming quarters, driven by positive regulatory changes, wider participation, and innovative structures.

The market is expected to pick up again in the fourth quarter (Q4) of the current fiscal year, which is typically the busiest period for securitisation activity. Icra predicts that the volume in Q4 could reach Rs 50,000 crore, driven by increased participation from non-banks and housing finance companies.

Market Trends and Developments

The securitisation market in India has witnessed several notable trends and developments during the past year. One significant change is the rise in the issuance of pass-through certificate (PTC) issuances compared to direct assignments. This shift is largely attributed to HDFC's exit from the market, which primarily used direct assignments for securitising its assets.

In terms of asset classes, vehicle loans continue to dominate the securitisation market, accounting for 35-40 per cent of the overall volume. Microfinance loans and mortgage-backed loans follow as the next largest asset classes, with shares of 22-25 per cent and 18-20 per cent, respectively.

Regulatory Impact on Unsecured Loans

The RBI's circular issued in November 2023, which significantly increased the risk capital for unsecured loans, is expected to impact the securitisation of such loans in the near term. This regulatory change may lead to a slowdown in the securitisation of unsecured loans as originators reassess their strategies in light of the increased capital requirements.

The securitisation market in India experienced a temporary setback in Q3 due to specific market dynamics and regulatory changes. However, analysts and industry experts anticipate a strong rebound in the coming quarters, driven by positive regulatory developments, wider participation, and innovative structures. The market is expected to continue its growth trajectory, supported by healthy credit growth among NBFCs, the retailisation agenda of banks, and favourable regulatory guidelines.