As per a report by domestic rating agency Care Ratings, the direct assignment route constituted the lion's share of the total volume at Rs 21,000 crore in FY14.
This was despite clarity on the taxation front as well as RBI guidelines on reset for credit enhancement (CE) for securitisation, which will help boost capital relief for the originators by the partial release of CE, the Care report said.
However, the RBI circular on change in treatment of the rural infrastructure development fund (RIDF) and certain other funds under priority sector guidelines has come as a relief for banks, but this could have a negative impact on new securitisation issuances going forward, the report warned.
The report also said though demand for priority sector loans continued to be the driving force of retail asset securitisation market, the recent RBI circular may reduce demand for priority sector assets going forward.
The asset backed securities (ABS) volumes stood at Rs 24,030 crore in FY14 while the share of ABS in total market volume stood at 84.9 per cent in the year. The CV/CE/PV markets continued to dominate the asset class, representing 74 per cent of the total ABS issuances in FY14.
Direct assignment route finds favour with investors again, as the securitisation market was primarily driven by direct assignments till FY12. But, after the introduction of new RBI guidelines in FY13 which stipulated that no credit enhancement be provided for direct assignment transactions, the market started moving towards SPV/PTC route as investors were more comfortable with the safety of credit enhancement provided in the SPV/PTC route.
Some of the factors for the buoyant growth in the direct assignment route market are taxation on PTCs, and the low yield of PTCs among others.
Introduction of the new tax regime for PTC deals, tax on income distributed by securitisation trusts which was earlier charged as a part of the investor's income became taxed at distribution enabled investors to adjust any expenses incurred against such income anymore.
Due to high demand for priority sector assets, the PTCs backed by such assets have very low yield compared to similar rated other market instruments. Hence, investors have to bear mark-to-market losses which affect profitability.
Another reason for the change is that originators do not have to provide any credit enhancement in direct assignment transactions under the new norms, helping them save on the capital requirement for securitised assets. Also, direct assignment cannot be placed below base rate unlike PTCs, offering higher yields to investors.
While NBFCs were the major originators, banks were the major investors in the market. In retail asset securitisation volumes, NBFCs' share stood at 74.4 per cent, while housing finance companies' share stood at 8.9 per cent and MFIs' share stood at 16 per cent.
Asset classes were led by commercial vehicle (CV), construction equipment (CE) and passenger vehicle (PV) loans worth Rs 17,770 crore were securitised in FY14.
The share of these three asset classes however was down to 63 per cent in FY14 due to the slowdown in fresh disbursements since H2 of FY13, while the share of MFIs grew from 13 per cent to 16 per cent, boosted by the new RBI guidelines on NBFC-MFIs.