CARE Ratings has come out with its report on Retail Asset Securitization market in FY14. The demand for priority sector loans continued to be the driving force of the retail asset securitization market in India, but the recent RBI circular may reduce demand for priority sector assets going forward.
Indian retail asset securitization market rated volumes have decreased marginally by around 6% to Rs. 283 bn1 in FY14 as against Rs. 303 bn in FY13. In FY14, although there was greater clarity with the introduction of a new tax regime in Union Budget, the market started moving towards 'direct assignment' route due to a combination of factors making it an attractive proposition for both the originators as well as the investors. The demand for priority sector loans continued to be the driving force of the retail asset securitization market in India, but the recent RBI circular may reduce demand for priority sector assets going forward.
ABS continues to dominate: Asset Backed Securities (ABS) volumes stood at Rs. 240.3 bn in FY14. The share of ABS in total market volume stood at 84.9% in FY14. CV/CE/PV continued to be dominant asset classes, representing around 74% of total ABS issuances in FY14.
Direct assignment route finds favor with investors again: Securitization market was primarily driven by direct assignments till FY12. But, after the introduction of new RBI Guidelines in FY13 which stipulated that no credit enhancement may be provided for direct assignment transactions, the market started moving towards SPV/PTC route as investors were more comfortable with the safety of credit enhancement provided in the SPV/PTC route vis-à-vis a direct assignment. But, it has been observed that direct assignment route has recorded buoyant growth in FY14. Some of the factors contributing to direct assignments regaining favour are:
1. Taxation on PTCs – With the introduction of the new tax regime for PTC transactions, tax on income distributed by securitization trusts which was earlier charged as a part of the investor's income became taxed at the time of distribution, which meant that investors could not adjust any expenses incurred against such income anymore.
2. Low yield of PTCs – Due to high demand for priority sector assets, the PTCs backed by such assets have very low yield compared to similar rated other market instruments. Hence, investors have to bear markto- market losses which affect their profitability.
3. The originators do not have to provide any credit enhancement in direct assignment transactions as per the new guidelines. Hence, they save on the capital requirement for securitised assets. Direct assignment cannot be placed below base rate unlike PTCs. Hence, investors get a higher yield.
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