IndiaThe loan securitization market is slowly buzzing with activity, encouraged by the widespread improvement in loan collections by lenders.
Most banks and even some non-bank financial corporations (NBFCs) reported a clear improvement in repayments after the progressive unblocking of the economy from June. Default rates, especially on mortgage and auto loans, have come down. This encourages investors to buy pools of securitized loans, one of the primary means for NBFCs to raise capital.
Securitization is a process by which multiple loans are consolidated and issued as a single security. The payment to the investor is directly linked to the recoveries of the underlying loans.
Repayments on these bundled loan securities have been hit after the Reserve Bank of India (RBI) asked lenders to grant a six-month moratorium on loans.
However, performance was encouraging after the moratorium, which ended in August, analysts said. “After the payment moratoriums ended in August, loan recovery rates for our Indian auto loan ABS (asset backed securities) and our MSME loan ABS (micro, small and medium enterprises) have improved markedly. in September and October, although they remained lower than before. – coronavirus levels, “analysts at Moody’s Investors Service Ltd. said.
The largest issuers of securitized loan pools are the NBFCs and these lenders have been the main drivers of growth over the past two years. In the face of the capital shortage, securitization of loan pools was a quick way to free up capital, especially when banks were willing buyers.
However, the pandemic changed everything. NBFCs’ balance sheets have weakened, with some experiencing severe contractions. The measures taken by the government to encourage investment have yielded limited results.
It is not a straight and quick road to recovery. For securitization, the road is much more difficult.
Bad debts are far from falling. Defaults could increase for small business loan pools, analysts say. These loan pools also had the highest proportion of loans under moratorium. The stress has not diminished, analysts said. “MSME loans are not showing much improvement. Thus, stocks that have them as their underlying will take a long time to perform, ”said one analyst.
Meanwhile, large cash reserves offset the stress on these securities. Stress will remain high for 6 to 12 months, Moody’s analysts said.
The outlook for default is not entirely optimistic and investors would prefer to hold back a little longer. The securitization volume had plunged 80% in the first six months of FY21 compared to the previous year. There are a lot of challenges to waking up early.
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