Promoting financial inclusion: Why the time is ripe for innovative loan securitisation

Updated: January 18, 2018 4:32 AM

One of the most important but overlooked features of securitisation market, especially in emerging markets, is its ability to build inclusive financial systems that bring affordable credit to unbanked segments.

The market for loan securitisation transactions in India has been growing steadily over the last five years, both in volume and ticket size. (Reuters)

The market for loan securitisation transactions in India has been growing steadily over the last five years, both in volume and ticket size. The value of securitisation transactions surged to a life-time high of Rs 102,500 crore in fiscal 2017, a remarkable 108% growth compared to Rs 49,500 crore worth of such transactions in 2013-14. This triple-digit increase in value terms has come against the backdrop of demonetisation. Securitisation as a financial instrument has been present in India since the early 1990s. It has been primarily used as a device for bilateral acquisition of assets by banks/financial institutions. Bilateral assignments have dominated the securitisation market in India, where around 80% of the securitisation is in the form of bilateral sales. Apart from bilateral assignments deals, securitisation transactions have also used SPV structures. Traditionally, a key driver for loan securitisation deals in India is banks’ requirement to meet priority sector lending (PSL) targets. The shortfall in PSL targets of banks is being met by purchasing portfolios from NBFCs. It is also used for diversification of the portfolio to manage credit exposures under various categories of assets. This helps in re-balancing and re-distributing risks such as credit, market or liquidity risk or risk of concentrations on the balance sheet, as the risks can be bundled or hived off and distributed between various assets as per their risk appetite. Securitisation structures are also helpful for inorganic growth as they provide alternate debt instruments by which funding can be arranged over and above the balance sheet. It frees up an originator’s capital by removing the assets from the balance sheet and improves the liquidity position as the future receivables are replaced by cash.

One of the most important but overlooked features of securitisation market, especially in emerging markets, is its ability to build inclusive financial systems that bring affordable credit to unbanked segments. A 2016 report by ratings agency Moody’s makes a strong case for securitisation being an important source of the funds NBFCs utilise for lending to promote financial inclusion. In both India and China, NBFCs are seen as important financial pillars outside the formal banking system in helping channel affordable finance, or simply availing credit, to individuals, micro-enterprises and SMEs. Their specialty is their ability to offer more tailored and flexible loan products to the underserved. Turnaround times from loan application to disbursement are faster than those of the banks. Their knowledge of local industries and submarkets and their ability to understand the credit profiles of their borrowers help them underwrite credit to borrowers otherwise ineligible for bank loans. Securitisation has a key role in both China’s and India’s credit markets: To realise a common goal of financial inclusion.

With securitisation market emerging as a potent financing tool, there are still inherent regulatory and practical challenges that is preventing it from achieving its full potential. Foremost is the tendency of banks to consider loan securitisation transactions as an alternative vehicle for filling gaps in meeting PSL requirement rather than as alternative and viable financing products. Further, loan securitisation products are considered as complex financial instruments due to which most market players prefer vanilla bilateral transactions. Prevailing guidelines have laid down narrow range of structuring possibilities. So, any securitisation transaction with innovative structure requires regulatory easing. From credit perspective, most of the investors still see it as an exposure on seller, not on the pool, which may enrich by support of various credit enhancements. The market for securitisation products in India is evolving and there is scope for growth. Considering the growth and maturity of the Indian financial markets, this is the appropriate time for innovative loan securitisation structures, especially with banks saddled with huge NPAs. Banks and market players must consider it as a mainstream financing channel where various forms of credit enhancements cover adequately the credit concerns and offers diversified range of investment opportunity with risk sharing among investors and seller of securities as well.

Mariusz Dabrowski & Nikunj Agarwal
Dabrowski is deputy CFO and Agarwal is AVP-treasury, Home Credit India Finance Pvt. Limited

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