The Indian structured finance market has been around for over two decades but remains quite restrictive for both issuers and investors, explains Arvind Rana, director, structured finance, APAC at Fitch Ratings

The market revolves around Indian banks' targets for lending to priority sectors. Banks have traditionally been the largest investors in securitised debt, as they need to fulfil the Indian central bank’s requirements to lend a target percentage of their loan books to priority sectors, which are defined by the central bank and include minorities, agriculture, SMEs and export industries. The limited investor base has constrained the growth of the SF market, as investors like insurance companies and asset managers are not very active in the market.

With these priority-sector loans (PSL) being prized by banks, PSL securitisation yields have sometimes fallen lower than term deposit rates with large Indian commercial banks. Indian public-sector banks also purchase a significant amount of non-priority sector loan (non-PSL) pools on a bilateral basis at very low risk-adjusted yields. This means that potential originators of securitisation in India have less incentive to securitise non-PSL pools with higher yields.

Indian SF notes are not listed due to their relatively small transaction sizes and are typically privately placed. These transactions are mostly bilateral and typically held to maturity. The bilateral nature of transactions makes the market less transparent and difficult for potential new issuers and investors to enter.

The asset classes available in India are also not the same as those in other jurisdictions. The top three asset classes in India are securitisation of commercial-vehicle (primarily trucks) loans, microfinance loans and loans-against-properties (mainly SME loans). Some globally popular securitisation asset classes are either absent or not popular in India, like personal-vehicle loan or consumer loan ABS, CMBS and RMBS.

The Indian SF market does have some advantages over some of the more developed markets. Typical Indian securitisation structures are very simple, mostly with one senior tranche, and cash or subordination. Some structural features that are often seen in other markets, such as revolving periods or controlled amortisation periods as well as pro-rata repayment, have not been observed in this market. Most transactions have purely sequential repayment structures. Indian transactions deleverage rapidly, reducing the credit risk for SF notes, as a result of their simple and sequential structures. This also reduces the cash flow modelling complexities for prospective investors and issuers.

The Indian economy has come under multiple stresses since the global financial crisis in 2007-2008, such as the 2012-2014 economic slowdown, demonetisation in 2016, goods and services tax implementation in 2017 and pandemic in 2020-2021. These stresses have enriched the historical performance data and increased the predictability of future asset performance. They have also helped Indian originators to enhance their underwriting and servicing capabilities. Fitch-rated ABS transactions demonstrated relatively stable asset performance, even during these stressful periods, which has resulted in stable rating performance.

There have been defaults by some large non-bank financial institutions in recent years, which tested the servicer replaceability and bankruptcy remoteness of securitised assets. Eventually, both features were adhered to by courts and other lenders. The events led to changes in the transaction structures, including a change in the ownership of the cash collateral from originator to trustee. These changes make Indian SF notes more comparable with those in other jurisdictions.