Higher volumes could turn securitisation into key funding source for NBFCs: Crisil

Non-banking finance companies (NBFC) are likely to rely on securitisation as a funding source led by higher volumes, which will lead to increased disbursements by non-banks after a slowdown. Banks can also improve their retail and priority sector targets through securitisation, ratings agency Crisil said in a report.

Securitisation volume grew by 70% to Rs 35,000 crore in the first quarter of the current financial year led by higher participation from public and private sector banks along with other financial institutions. Foreign financial institutions, including banks, acquired 17% of all assets securitised. A stable market environment could mean deeper participation by other large investors, including foreign institutions and mutual funds, the agency said.

Additionally, the base effect caused by low volumes last fiscal due to second wave also led to sharper growth in Q1FY23. The growth in securitization volumes would have been higher if not for higher interest rates, which prompted divergent yield expectations among NBFCs and banks the ratings agency said.

“More than 80 non-bank entities being present in the market in the first quarter, up from 50 last fiscal, indicates strong comfort originators have with the securitisation process. Market activity in the past quarter also reflected the diversity of various asset classes across secured and unsecured loan categories,” Krishnan Sitaraman, senior director and deputy chief ratings officer of CRISIL Ratings said.

Mortgage-backed securitisation (MBS) loans comprised 45% of the total volume compared with 53% in the previous year while asset backed securitisation (ABS) comprised the balance.

Within the ABS category, commercial vehicle (CV) loans comprised 49%, and microfinance 20% of transaction value, with many underlying loans eligible for priority sector lending (PSL) classification. Securitisation in gold loans (14%) continued to rise, while two-wheeler, education, school finance and unsecured loans saw renewed investor interest.

However, any sharp rise in interest rates, high inflation and future waves of the pandemic impacting economic activity could be potential headwinds for securitisation volumes this fiscal, the report said. 

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