Securitisation has emerged as a crucial financial tool in India’s lending ecosystem, allowing non-banking financial companies (NBFCs) and housing finance companies (HFCs) to manage liquidity, mitigate risks, and enhance credit flow. According to a recent assessment by ICRA, securitisation volumes in India are expected to touch Rs 60,000 crore in the second quarter of the financial year 2024-25 (Q2FY25). This marks a significant growth trajectory, driven by factors such as increased credit demand, improving macroeconomic conditions, and enhanced investor confidence.
Understanding Securitisation
Securitisation is a process where financial institutions pool assets such as loans, mortgages, or receivables and sell them to investors in the form of securities. This process helps lenders free up capital, diversify risks, and improve liquidity, enabling them to offer more credit to borrowers.
There are two primary forms of securitisation in India:
- Direct Assignment (DA) – Involves the sale of loan portfolios directly to investors with minimal structuring.
- Pass-Through Certificates (PTCs) – Involves the issuance of structured securities backed by loan pools.
Both these forms play a crucial role in strengthening the financial markets and providing funding avenues to NBFCs and banks.
Factors Driving Securitisation Growth in Q2FY25
1. Strong Credit Demand
India has witnessed robust demand for retail credit, particularly in sectors like housing, vehicle financing, microfinance, and small business loans. As economic activity accelerates, banks and NBFCs are looking to securitisation as a means to fund this increasing credit appetite without straining their balance sheets.
2. RBI’s Regulatory Support
The Reserve Bank of India (RBI) has implemented progressive measures to encourage securitisation, including revised guidelines that enhance transparency and investor confidence. The framework ensures standardization, mitigates risks, and fosters a more robust secondary market for securitised assets.
3. Improved Liquidity Conditions
The Indian financial markets have been witnessing stable liquidity conditions, with institutional investors such as mutual funds, insurance companies, and foreign portfolio investors (FPIs) showing interest in securitised instruments. This has provided a conducive environment for growth in securitisation volumes.
4. Rise in NBFC and HFC Activity
NBFCs and HFCs play a pivotal role in the Indian credit landscape, often catering to borrower segments that are underserved by traditional banks. With an increasing number of NBFCs turning to securitisation to meet their funding needs, the volume of transactions is expected to rise significantly.
5. Increase in Retail Loan Pooling
The surge in retail loans, particularly from segments like microfinance and vehicle loans, has led to greater securitisation activity. Retail asset-backed securities (ABS) continue to dominate the market, with small-ticket loans being packaged into securitised instruments for investors seeking diversified risk exposure.
Market Trends and Performance in Q1FY25
In the first quarter of FY25 (Q1FY25), the Indian securitisation market recorded a steady increase in volumes, setting the stage for an even stronger Q2FY25. Key trends observed include:
- A higher share of retail loans in overall securitisation.
- Increased participation from public sector banks.
- Higher adoption of PTCs, driven by institutional investor demand.
- Growing interest from global investors in Indian securitised assets.
Challenges Facing the Securitisation Market
Despite the positive outlook, the securitisation market in India faces certain challenges that could impact its growth trajectory:
1. Credit Quality Concerns
While retail loan securitisation remains strong, concerns over asset quality, particularly in unsecured lending, could impact investor confidence. High delinquencies in some segments, such as microfinance and personal loans, need to be monitored closely.
2. Interest Rate Volatility
Fluctuations in interest rates can affect the attractiveness of securitised instruments. Rising rates could lead to higher borrowing costs for NBFCs, potentially slowing down the pace of securitisation.
3. Regulatory Compliance and Risk Management
Stringent regulatory norms, while necessary for stability, can sometimes pose operational challenges for market participants. Ensuring compliance with evolving RBI guidelines remains crucial for sustaining market momentum.
Outlook for Q2FY25 and Beyond
With an estimated Rs 60,000 crore in securitisation volumes expected for Q2FY25, the Indian financial market is poised for continued expansion in this segment. The following factors will play a key role in shaping the future trajectory of the market:
- Innovation in Structuring Transactions – The market is likely to see more innovative structuring of transactions, including hybrid models that combine DA and PTC features for better risk allocation.
- Greater Participation from Institutional Investors – Insurance companies, pension funds, and global investors are expected to increase their exposure to securitised assets, providing a stable source of funding.
- Expansion of the Secondary Market – A deeper secondary market for securitised assets will enhance liquidity and attract more investors, further strengthening the ecosystem.
- Digital Transformation in Lending – Fintech-driven lending models will create new avenues for securitisation, especially in the digital personal loan and BNPL (Buy Now, Pay Later) segments.
Conclusion
The projected securitisation volume of Rs 60,000 crore in Q2FY25 highlights the growing importance of this financial tool in India’s credit market. Driven by strong demand, supportive regulations, and investor confidence, the market is set for significant expansion. However, stakeholders must navigate challenges such as credit risks and regulatory compliance to ensure sustained growth. As the market matures, securitisation will continue to play a vital role in enhancing financial inclusion and deepening capital markets in India.