In order to meet large capital needs to support the demand for credit, banks are looking at taking the risk of personal loans off their balance sheet by securitization, and releasing capital to service more loans upfront.
In the market of asset-backed securities, pools of personal loans have increased loans compared with the traditional asset classes such as auto loans and commercial vehicle loans. According to rating agencies, banks and other non-banking finance companies (NBFCs) have securitized a total loan portfolio of approximately Rs14,000 crore in the first six months of the fiscal, compared with Rs36,000 securitized in 2005-2006.
Out of this pool, asset- backed securities (personal loans, auto loans, commercial vehicle loans) account for about Rs7,200 crore. Personal loans in this pool of asset-backed securities now account for 48% of the pie compared with 10% in the last fiscal. According to bankers, since margins are higher in personal loans compared with auto and commercial loans, originators have an incentive to sell this portfolio. The other part is the single loan securitization by large Indian corporations.
Securitization is the process by which a bank or an NBFC separates a group of assets from its balance sheet. The assets are then placed under the legal control of a separate entity known as a special purpose vehicle (SPV). The SPV then issues bond-like instruments to investors such as other banks or mutual funds.
These instruments are called pass through certificates. These are the investors who rely upon the repayment of their principal and interest from the cash flow generated by the assets.
However, the bank or NBFC originating a pool of assets to be securitized has to provide a guarantee in the form of a cash collateral, which may vary between two and three times the estimated losses that could generate from the asset class, in case of delinquencies. In case of a default, the SPV or trust dips into this pool called “credit enhancement” and ensures that the investors receive the pool.
In June and July, ICICI Bank Ltd, a large player in the securitization market, securitized a total of Rs3,800 crore of assets, out of which Rs3,400 crore was accounted for by personal loans. Another official of a large Mumbai-based private sector bank, who didn’t want to be identified, also confirmed they are keen on securitizing personal loan pools and waiting for investors with the right appetite. He said investors have become a little wary since the credit markets caught the subprime chill and are preferring loans of shorter tenures of one-two years rather than loans with a tenure of five-seven years.
Domestic credit rating agency Icra Ltd, an associate of the global credit rating agency Moody’s Investor Services, in a report on the trends of securitization in India published in June, said in the outlook for second half of the fiscal year that personal loans may be securitized “to greater extent given the growth rate in this asset class”.
Vishakha Muley, chief financial officer of ICICI Bank, said securitization of loans is important because it not only releases capital but also can act “as a good source of liability for the originator bank”. Further, securitization of personal loans also relieves the originator bank from making provisions on personal loans. Banks have to provide 2% on the personal loan portfolio.
Thus, for every Rs100 personal loan the bank gives, it has to provide Rs2, which is deducted from the operating profit. For the subscribing bank, securitized paper forms a part of its investment portfolio and thus it does not have to make any provisions even as the underlying assets comprise personal loans.