​​​​​​​ICRA expects the number of funds raised through securitization by the small finance banks (SFBs) to exceed Rs 10,000 crore in FY2024, as against Rs. 6,400 crore in FY2023, including both pass-through certificate issuances as well as direct assignments. Q3 FY2024 alone witnessed the quarterly record high securitization volumes of ~Rs 4,200 crore. The market share of SFBs in the securitization market would accordingly touch a peak of 6% in FY2024 from levels of sub-2% before FY2022. In FY2024, six SFBs raised funds through this route against four in FY2023 and only two in FY2022. The increase in the number of SFBs securitizing their assets signals a deepening of the domestic securitization market, as it provides them an alternate route to raise funds to sustain their growth momentum.

• Record number of originators tap the market: ICRA
• Q3 FY2024 volumes at record high of ~ Rs. 4,200 crore

Speaking on this, Mr. Abhishek Dafria, Senior Vice President, and Group Head - Structured Finance Ratings at ICRA said: “The securitization market has traditionally been dominated by non-banking financial companies and housing finance companies acting as originators and thus the emergence of SFBs has helped in expanding the market. The SFBs are witnessing healthy growth in their gross advances at ~24-25%, which is likely to continue in the near term, given the strong credit appetite in the country. While deposits continue to be a significant share of the overall funding mix, the SFBs have increased the share of securitization in FY2023 and YTD FY2024 to diversify their funding mix. Further, with increased competition for deposit mobilization as well as slowing deposit growth, ICRA expects them to continue to increase their securitization volumes in the near term.”

The overall domestic securitisation market has seen strong growth in recent years and is estimated to be around ~Rs 1.9 - 2.0 lakh crore for FY2024 compared to Rs 1.8 lakh crore in FY2023, supported by high funding needs for the originators, coupled with the increase in both originators and investors in the securitisation market. In line with the growing acceptance and familiarity on securitisation, the SFBs are also successfully utilising this channel to ensure that growth in the loan book remains robust even if the deposit growth was to witness any challenges. The SFBs have securitised receivables from vehicle loans, microfinance loans, business loans as well as home loans, with a high share of the assets qualifying under priority sector lending (PSL), thereby finding good demand in the banking sector. Further, investor confidence is likely to have increased in recent years as the SFBs are demonstrating better asset quality for the post-Covid originated portfolio. The improvement in their credit profile is also an important factor since they would continue to act as the servicer for the securitisation transactions.

“The securitization market with SFBs as the originator is still skewed towards the behavior of the largest player, given its significant scale. However, the share of the top player has reduced in the last two years with new originators participating in the securitization market. Similarly, we are seeing interest even in pass-through certificates rated lower than AAA(SO), as investor confidence has risen for a few other originators as well. The passthrough certificate yields are trending ~100 bps higher than the average cost of funds for the SFBs and like the level for the other borrowings of the originators,” Mr Dafria added.

Source: ICRA Press Release.