During the financial year (FY) 2012, while the asset-backed securitization (ABS) issues have increased by 58% to 178 transaction from 113 (FY11), while the residential mortgage-backed securitization (RMBS) registered marginal increase to 22 transaction from 14 (FY11) only, according to a joint study by ICRA and ASSOCHAM.
ABS is an investment option. An ABS gets its returns from assets such as loans, leases, credit card debt, a company’s receivables, royalties and so on. For investors, asset-backed securities are an alternative to investing in corporate debt, while it offers a way to raise money for companies.
The total number of issuers in the ABS space increased from 23 to 33 as some microfinance entities entered the securitization (or assignment) market. Shriram Transport Finance Company, SREI Equipment Finance, Indiabulls Financial Services Ltd., Sundaram Finance and Shriram City Union Finance were the largest Originators in FY2012, altogether contributing to over 60% of the total number of ABS issuances. Banks continued to be absent from the securitization market as Orginators (although they continue to be a key investors segment).
The survey, however, found that the increase in ABS was only 19% in value terms as the average deal size was lower at Rs. 146 crore in FY12 compared to Rs 193 in FY 2011. “This was on account of higher number of Microfinance transaction executed in FY2012 at 65 that was about twice the issuance in FY2011 at 34,” the report said.
In FY2012, Commercial Vehicle (CV) and Construction Equipment (CE) loans continued to be the key asset class accounting for two-thirds of the total ABS volumes. The long and relatively stable track record of CV / CE lending in the country (also demonstrated through good performance of the past pools) and the relatively larger size of CV / CE loan portfolios in the industry have been the key factors for the popularity of this asset segment in securitization.
Microfinance and SME loans, which had a small share in securitization in the previous year’s emerged as the other key loan categories to be securitized accounting for almost 11% each in FY2012 from about 7% and 2% in FY2011. However, there was some securitization of Two Wheeler loans in FY2012, a segment absent during the previous two years.
As is usually the trend every year, the overall volume in the first quarter of FY2012 – was very low, while the last quarter accounted for the largest share – almost 62% of the total annual volume. Microfinance securitization picked up significantly in the last quarter, driven by the Priority Sector Lender (PSL) targets of banks (who were key investors in these transactions).
The number of Resident Mortgage- Backed Securitization (RMBS) issuances increased to 22 in FY2012 along with an increase of 53% in value terms. However, average deal size marginally reduced to Rs. 349 crore in FY2012 from 359 crore in FY2011. RMBS segment continued to be highly concentrated with HDFC and Dewan Housing Finance, which together contributed to about 85% of all issuances.
Despite higher issuances seen in the year, the traditional obstacles to RMBS in India, viz., long tenure of RMBS paper, the lack of secondary market liquidity, high stamp duty on transfer of security, tenure uncertainty, interest rate risk and prepayment risk, continued to hinder the growth of this segment. Nevertheless, regulatory requirements – certain category of home loans qualify as priority sector lending – provide the motive for trading in home loans too. Accordingly, banks were typically the investors in these transactions.
Mortgage loans typically carry floating rate yield, leading to uncertainty of cashflow of such loans – unlike other retail loans wherein the interest rate is fixed. Owing to this feature, together with the potentially higher volatility of prepayment rates in the case of mortgage loans. “par” structure are preferred in the case of RMBS. All the 22 RMBS transactions executed in FY2012 had a par structure.