According to ICRA, securitization of loans made by small financing institutions would surpass Rs 10,000 cr in FY2024
According to ICRA, the total amount of money that small finance banks (SFBs) raise via securitization is anticipated to surpass Rs 10,000 crore in FY2024, compared to Rs 6,400 crore in FY2023. This number includes both direct assignments and the issue of pass-through certificates. Securitization volumes reached a new high of over Rs 4,200 crore in Q3FY2024 alone. Accordingly, it was said, the market share of SFBs in the securitization market will reach a high of 6% in FY2024 from levels of less than 2% in FY2022
Six SFBs raised money using this method in FY2024 compared to only two in FY2022 and four in FY2023. Since it gives them another way to borrow money to maintain their development pace, the number of SFBs securitizing their assets is increasing, which indicates that the domestic securitization market is becoming more developed.
“The securitization market has traditionally been dominated by non-banking financial companies and housing finance companies acting as originators; therefore, the emergence of SFBs has helped in expanding the market,” stated Abhishek Dafria, Senior Vice President and Group Head – Structured Finance Ratings at ICRA. With the nation’s high credit demand, the SFBs are seeing good growth in their gross advances at around 24–25%, and this trend is anticipated to continue in the near future. The SFBs have raised the percentage of securitization in FY2023 and YTD FY2024 as a way to diversify their financing mix, even if deposits still make up a sizable portion of the total funding mix. Furthermore, ICRA anticipates that they will keep raising their securitization volumes in the near future because to heightened rivalry for deposit mobilization and sluggish deposit growth.
The total domestic securitization market has grown significantly in recent years, with estimates for FY2024 being between Rs 1.9 and Rs 2.0 lakh crore, up from Rs 1.8 lakh crore in FY2023. This growth has been fueled by the originators’ high funding needs as well as the rise in the number of investors and originators in the market.
As securitization gains popularity and acceptability, SFBs are effectively using this channel to guarantee that loan book expansion continues unhindered even in the event that deposit growth encounters difficulties. With a large portion of the assets qualifying under priority sector lending (PSL), the SFBs have securitized receivables from house loans, auto loans, microloans, and business loans. As a result, the banking industry has shown a strong demand for their products.
Furthermore, given the SFBs’ improved asset quality for the portfolio that was created after Covid, investor trust has probably grown recently. They would still serve as the securitization transaction servicer, thus the enhancement of their credit profile is equally crucial.
Given its substantial magnitude, the securitization market with SFBs as the originator is still biased toward the actions of the biggest participant. However, with new originators entering the securitization market during the last two years, the dominant player’s stake has decreased. Similar to this, investor trust has increased for a few other originators, and we are seeing demand even in pass-through certificates rated lower than AAA(SO). According to Abhishek Dafria, the pass-through certificate yields are trending around 100 basis points higher than the SFBs’ average cost of funding and at a level comparable to their other borrowings.
