FY23 Structured Finance Outlook: Market -; New Regulatory guidelines conducive to Growth in securitisation volumes - Ind-Ra

15 Feb 2022 , 01:16 PM

India Ratings and Research (Ind-Ra) has a neutral loan performance outlook across all asset classes for FY23, except for unsecured consumer loans, based on a continued economic recovery and a possible lower impact of any future waves of the COVID-19 pandemic. The economic recovery in FY23 would be aided by fiscal measures, vaccine roll-out in the country, and improving consumer sentiments translating into actual spending. The agency believes priority sector lending demand and securitization volumes would go back to the pre-COVID levels in FY23 across asset classes, although with tighter eligibility criteria for unsecured loans. The measures announced in the recent budget to support micro, small and medium enterprises, increase infra-spending, and boost digitization in the rural sector could lead to improved collections and asset performance among securitized assets.

Ind-Ra expects co-lending arrangement, along with the traditional models such as securitisation and loan transfers (erstwhile direct assignments), to stay an important liquidity avenue for non-bank lenders in FY23, in a possibly increasing interest rate scenario. Securitisation provides a further security cover to investors in the form of credit enhancement (CE) which supports such transactions in times of increased stress. The agency expects the liquidity of residential mortgage loans to improve due to a favourable revision in RMBS requirements such as the minimum holding period, minimum retention requirements and CE reset conditions. Also, the market has already witnessed a couple of Simple, Transparent, and Comparable framework-compliant transactions in FY22.

The agency witnessed a continued improvement in the performance of securitisation transactions after the huge impact of second covid wave, with the increase in collections across asset classes (Figure 2). While the delinquencies remain higher than pre-pandemic trends, the overdue loans in softer buckets have restarted to perform. Most asset classes, except unsecured consumer loans, have their delinquencies contained in the agency-rated transactions. Also, the agency believes that the third covid wave may not have a significant impact, given the nature of infection, so far, has largely not been life-threatening. However, the performance of securitisation transactions may not indicate the market level default rate as these loans are cherry-picked by investors.

Asset Performance Outlook: While Ind-Ra has a neutral asset performance outlook on vehicle loans, including loans for commercial vehicles, passenger vehicles and two-wheelers, given the improved industrial and construction activity as well as general mobility, tractor loans are expected to perform well due to continued stable agriculture sector growth. Small business loans are also expected to witness a neutral performance in FY23 versus last year across both secured (principally loans against property) and unsecured business loans. The unsecured loans asset performance outlook (including microfinance loans) has been revised to neutral for FY23 from worsening in FY22, owing to the stricter underwriting policies now adopted by lenders and focus restricted mainly on essential services. On the other hand, secured retail loan segments including home loans and gold loans have a neutral outlook, given their steady performance. Details on the expected loan performance are elaborated in the outlook report.

Stable Rating Outlook on the back of Steady Pool Performance: The rating Outlook for rated transactions is stable for FY23 across asset classes, largely driven by an improving market sentiment, which has led to collection efficiencies rising to their pre-COVID levels. Also, investors have been diligent in selecting asset pools for transactions over the last two years. As a result, there has been a gradual decline in CE being utilized. Apart from the Ind-Ra rated microfinance loan pools, which got paid in full during the year, the agency resolved Rating Watch Negative on all its unsecured business loan transactions. This was supported by a strong recovery from the underlying borrowers and high CE build-up in the transactions.

Credit Support Schemes for Borrowers: The support given during the second covid wave in the form of one-time restructuring 2.0, extension of Emergency Credit Line Guarantee Scheme and other benefits by the government to the micro, small and medium enterprise sector offered immediate liquidity support to borrowers and therefore, provided stable asset quality metrics to lenders. Ind-Ra expects such borrowers to show slippages post moratorium (of ECLGS) mostly in FY23 and in restructured loans after they return to their normal payments. The majority of Ind-Ra rated securitised pool however witnessed eligibility criteria such that no borrowers in the pool should have availed such benefits, to make sure that the pool quality and the expected future performance are relatively less risky.

Acceleration of Digitisation: The pandemic has accelerated the digitisation of processes among lenders in terms of collections and origination processes. Non-banks are reaching out to borrowers and onboarding customers with reduced turnaround time with the help of digitisation. Originator’s apps targeted at different stakeholders are witnessing increased adoption day-by-day. These developments would bring in business efficiency and also improve the transparency of the processes.

The FY23 union budget has provided multiple opportunities to enhance the growth of digitisation. The budget aims to homogenise payment systems across the country by setting-up digital banking units in multiple districts of rural and semi-urban regions. Also, the announcement of all the 150,000 post office accounts to be connected with the core banking system would improve digital collections in rural areas.