The liquidity crisis among non-banking lenders has had a major effect on India’s market for securities. With such lenders selling their loan portfolios to raise funds, the securitization of loans has more than doubled. According to ICRA Ltd, securitization volumes hit 2 trillion in 2018-19, up from 840 billion the year before—an impressive jump in the sell-off of loans as assets.

This steep rise may remind some of us of the US subprime crisis, which was partly caused by a meltdown in its securitization market, where bad loans had been bundled with good loans and hawked in packages. Thankfully, securitization in India mostly involves retail loans, which have low default rates.

Still, such a sharp rise in loan sell-offs might entail risks. The Indian market is nascent, and this asset class is unfamiliar to many investors. Also, credit risk being shifted around, as securitization enables, makes it harder to assess systemic risk. As primary loan issuers grow distant from final risk bearers, regulators such as the Financial Stability and Development Council must keep a close watch. The market’s growth is desirable. But overall stability must not be compromised.

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