Securitisation is the process of turning assets like mortgages, loans and other receivables into securities that can be sold to investors. It involves pooling together cash-generating assets and repackaging them into securities that are backed by those assets.
Banks and other lenders can free up capital to make space for more loans by securitising assets they would otherwise hold on to their balance sheets. The process allows them to pass on the risks and rewards of owning the assets to outside investors.
To securitise assets, lenders first set up a special purpose vehicle (SPV) to hold the assets. The SPV buys the assets from the lender and pays for them by issuing securities backed by the assets. The securities are structured into different tranches that split the risk to appeal to various investors.
The SPV makes payments to investors from the income generated by the underlying assets. Investors who buy the securities take on the risks associated with these assets in exchange for regular payments.
Securitisation provides a way for lenders to offload their loan books, freeing up capital that can be lent out again. This helps explain the continued appeal of securitisation for Indian financial institutions despite the earlier regulatory speed bumps.
In the future, securitisation will likely play an important role in India's financial markets as banks and other lenders utilise it to manage risk exposures and access new funding.
Securitisation took off in India in the early 1990s mainly to allow finance companies to sell off their loan portfolios bilaterally. After getting underway in 1996, securitisation volumes scaled new heights year after year. The party kept going until around 2005.
The 2006 RBI guidelines1 imposed strict rules around the capital relief available to banks through Pass Through Certificate (PTC) transactions. As a result, the PTC route became less preferred by banks post the 2006 guidelines. The securitisation volumes through PTCs reduced significantly compared to 2005 levels.
Securitisation volumes jumped up by around 60% year-on-year to INR 55,000 crore in the April-June quarter2 in Financial Year 2023-24, the highest ever for the first quarter of a financial year, according to a CRISIL Ratings report2.
India's securitisation has seen a substantial recovery and turnaround after the Covid setback. Volumes have ramped up again and should clock in at INR 1.9 lakh crore in the Financial Year 2022-232, close to the pre-pandemic levels.
Microfinance loans distributed by NBFCs are emerging as a popular asset segment inspired by securitisation due to the fintech revolution in India. Compared to other developed economies, this contribution is much lower. Leveraging enhanced asset quality and robust credit expansion, Indian NBFCs have exhibited impressive growth in their assets under management (AUM), recording a robust 16% increase in FY23. Notably, the retail segment experienced an even higher AUM growth of 25% in the same fiscal year, amounting to an AUM of INR 14 trillion.
According to ICRA3, the momentum in securitisation is expected to persist, with NBFC’s retail AUM projected to grow 12-14% in FY24. Factors like pent-up demand, digitisation, and enhanced underwriting process will favour lending across a larger demographic and catalyse the growth trajectory.
Historically, retail investors have avoided securitised debt instruments (SDIs) due to large minimum buy-ins and complex processes. However, Fintechs are now breaking down these barriers and opening the market to individuals. Companies like Grip are spearheading the charge and driving inclusion through innovative products such as BondX, InvoiceX, LoanX and LeaseX.
Grip is breaking down barriers and opening up the world of bonds to more investors through BondX. By pooling investment-grade bonds together and splitting them into smaller pieces, Grip is parcelling out access to get more people invested. This fractional method allows investors to diversify across multiple bonds without being priced out. Grip is thinking outside the box to drive inclusion and make this asset class more attainable.
Grip is smoothing out and speeding up the entire bond investing process. They have engineered an end-to-end digital platform that cuts out inefficiencies. Investors can quickly research, select, and manage bonds online. Grip is prioritising trust and transparency with BondX. All bonds are carefully evaluated and undergo a stringent credit standards process before inclusion. Grip has also partnered with credit rating agencies such as CARE, ICRA, CRISIL, and India Ratings to validate the bond issues independently.
By reducing the minimum investment amount and modernising access, Grip is opening up fixed-income products previously out of reach of retail investors. The innovative SDIs on Grip have made access to these prominent opportunities easy for retail investors.
To sum up, securitisation in India has come a long way but still has room to grow. Currently, securitisation activity is ramping up across many sectors, though banks remain wary of taking on the risks involved.
For securitisation to take off, regulations need to be further eased up and clarified. Awareness about securitisation must be spread so that more companies and retail investors participate. Once regulatory bodies iron out the obstacles, securitisation can open the floodgates of financing for India's growing economy.
Explore Grip to learn more about securitisation and current opportunities available in the market.
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