SH 2014 1 ICRA Structured Finance

Structured Finance Ratings Group

Contacts:

Kalpesh Gada

Head—Structured Finance (91) 22-61796369

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Remika Agarwal Assistant Vice President

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Vibhor Mittal Assistant Vice President

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ICRA RESEARCH SERVICES

ICRA RATING FEATURE

Update on Indian Securitisation Market

Securitization issuance volume declines marginally but bilateral assignments more than double during FY 14

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Executive Summary

Issuance volume of rated transactions in the Indian securitisation market1 fell by 5% over the previous fiscal to Rs. 28,800 crore2 in FY143. The volume of

securitisation of Asset-Backed Securitisation (ABS) declined by 14% while that of Residential Mortgage-Backed Securitisation (RMBS) increased by 75% (albeit

on a small base) in FY14. The decline in securitisation volumes could largely be attributed to the new tax treatment, viz., the tax on distribution of income by the

Trustee, introduced by the Union Budget 2013-14 which adversely impacted the post-tax yield for banks, the key investor set for these transactions. On the

other hand, ICRA estimates that the volume of the bilateral retail loan pool assignments/ Direct Assignment (D. A.) transactions grew by 150% to around Rs.

20,000 crore in FY14. Thus, the combined value of retail loans assigned / securitized in FY14 was around Rs. 49,000 crore (29% growth over that of FY13).

Securitisation of Commercial Vehicle (CV)/ Construction Equipment (CE) loans continued to dominate the ABS market followed by Microfinance, Tractor, SME

and Car loans. The RMBS market, on the other hand, was a mix of both Home Loans and Loan against Property (LAP) contracts.

The issuance of the much awaited guidelines on the reset of credit enhancement in securitisation transactions was welcomed by market participants. The

provision for the CE reset is expected to provide some benefit for the Originators in terms of lower effective cost of securitization and consequently improved

profitability. While the new tax treatment was expected to open the path for mutual funds (MF) to invest in securitization transactions, the MF industry

continued to stay away from the same owing to unresolved tax-related litigations on past transactions. In FY14, private sector and foreign banks continued to

be the key investors in securitisation/ D.A. transactions, mainly driven by priority sector lending (PSL) motive. However, unlike the previous fiscal, FY14 also

witnessed notable interest from public sector banks in D. A. transactions (both PSL and non-PSL), spurred by the intent to aggressively grow their retail loan

book. ICRA also noted increased participation from some NBFCs, HNIs and PE firms (many of them being first time investors) in relatively lower rated and higher

yielding paper, purely for commercial reasons. From the Originators’ perspective, attractive pricing was the main motive for doing securitisation/ D. A.

transactions followed by the associated benefits of capital relief (in some instances) and tenure-matched funding (more pronounced in the case of RMBS).

ICRA expects banks to continue to utilize the securitisation/ D. A. route to meet their shortfall in priority sector lending targets. However, the reliance on the D. A. route for acquiring PSL assets is expected to increase further unless there is a change in the PTC taxation regime. Overall, the way the securitisation / D.A. market evolves in FY15 will depend on factors like changes in regulatory norms pertaining to PSL classification, the ability of the banks to meet PSL targets on their own or through some alternate channels, regulatory clarification on taxation related issues, interest from public sector banks in acquiring retail assets and the pace of growth in loan book of the key Originators.

1Here the estimated size of the overall securitisation market refers to the rated loan securitisation deals (done through SPV/PTC route). A separate comment has been made on the likely quantum of unrated bilateral deals later in the report 2 1 crore = 10 million = 100 lakh 3 Financial Year 2013 - 14, i.e. April 1, 2013 to March 31, 2014

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Subscribe to the full report for the following and more:

1 Executive Summary

2 Indian Securitisation Market

a. Discussion on securitisation volumes and key products getting securitised

b. Execution of Direct Assignment transactions

c. PSL motive behind transactions

d. Trend in securitisation across quarters

e. Discussion on structures gaining prominence

f. Discussion on rating levels gaining prominence

3 Asset-Backed Securitisation

a. Discussion on key asset classes dominating the ABS space

4 Residential Mortgage-Backed Securitisation

5 Update on Key Regulatory Changes Impacting Securitisation

a. Guidelines on Reset of Credit Enhancement for Securitisation Transactions (July 2013 and March 2014)

b. Revision of Limits under PSL Classification (May 2013)

c. Taxation of Securitisation Trusts (February 2013)

6 Summary and Outlook for FY2015

Graphs and tables included

a. Trend in rated securitisation/assignment (number)

b. Trend in rated securitisation/assignment (value)

c. Table - Trend in securitisation Issuances (including rated bilateral assignments)

d. Table- PTC Vs Direct Assignment Transactions – Key considerations from Investor’s perspective

e. Year-wise quarterly trend in issuances

f. Number of Originators across years in retail loan securitisation

g. Share of par/ premium structure in transactions

h. Distribution of transactions based on number of tranches

i. Trend in ratings for senior instruments

j. Issuance Volumes in Indian ABS Market

k. Asset Class-wise volumes of ABS Pools

l. Trend in MFI transactions

m. Share of Multi Originator transactions in overall MFI transactions

n. Issuance Volumes in Indian RMBS Market

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Contents may be used freely with due acknowledgement to ICRA.

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SH 2014 1 ICRA Structured Finance

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