Healthy pickup in credit demand for NBFCs, HFCs in Q1

Securitisation volumes, originated largely by non-banking financial companies (NBFCs) and housing finance companies (HFCs), are estimated to be about Rs 33,000 crore in the first quarter of the current financial year (FY23) – reflecting a growth of 1.9 times over the corresponding quarter of the previous fiscal when it was pegged at Rs 17,200 crore.
A latest analysis by ICRA attributes the surge to macroeconomic stability and also the fact that the last two fiscals were hit by pandemic forced lockdowns and the ensuing dip in demand.

“The key reason for healthy volumes in Q1 of the current year is the overall macroeconomic stability with no major disruptions which resulted in robust credit growth for NBFCs and HFCs on a YoY basis. As opposed to this, in the previous two years, the first quarter in each of the year had been hit by the Covid-19 pandemic resulting in lockdowns and reduced credit demand due to slowdown in economic activities,” said a statement by ICRA.

Further, mortgage-backed loans formed the largest chunk of total securitised volumes at around 46 per cent followed by vehicle loans at around 24 per cent. Meanwhile, number of originators who securitised their assets in Q1FY23 increased to 70 from 46 in Q1FY22.

According to Abhishek Dafria, Vice President and Group Head, Structured Finance Ratings at ICRA, the growth in credit demand has led to disbursements picking up for NBFCs and HFCs in Q4FY22 and remained buoyant in Q1FY23 as well thereby resulting in higher funding requirements, which have been partly met through the securitisation of their retail loans.

“Securitisation is a key tool for these companies which will help them diversify the means of funding and broaden their investor base. Furthermore, stable collections across all asset classes have led to higher investors’ confidence and brought them back to the securitisation market,” said Dafria.

“Collection efficiencies have remained healthy over the past 5-6 months with ICRA-rated pools showing 97-101 per cent collection in April 2022, a month when collection efforts are otherwise typically low. If there are no pandemic related disruptions, we expect securitisation volume could cross Rs 1.5 lakh crore in FY2023 as against Rs 1.3 lakh crore in FY2022,” he added.

Securitisation in India is carried out either through Direct Assignment (DA) transactions (bilateral assignment of pool of retail loans from one entity to another) or through the pass-through certificate (PTC) route (instruments issued by bankruptcy remote trusts), as per ICRA.

Traditionally DAs have accounted for around 60 per cent share and balance 40 per cent is by PTCs. For Q1FY23, the share of DA and PTC was in line with the past trend.

According to Sachin Joglekar, Assistant Vice President and Sector Head, ICRA, preference towards PTCs increases during periods of uncertainty as PTC structures have credit enhancements that help curtail losses to investors.

“Though rate hikes by the Reserve Bank of India had some impact in May when originators and investors postponed some ongoing transactions, securitisation activity picked up in June as more clarity emerged,” said Joglekar.