Loan Sell-downs Of Personal Loan Pools May See A Temporary Pause: Icra

In an aftermath of the latest notification by the Reserve Bank of India (RBI) to increase the risk weights for consumer credit exposure of banks which mainly consists unsecured asset classes and non-banking financial companies (NBFCs) by 25 per cent is likely to impact sell-downs of personal loan retail pools, which have gained acceleration in the past few years, states credit rating agency, Icra. 

Selling down a loan is a facility where participation in a multilender commercial and industrial loan whereby a portion of the offering is distributed through a selling group acting as agents.

Loan sell-down (direct assignment transaction) by NBFCs providing personal loan, has amounted to about Rs 1,150 crore in FY23 and has already crossed the mark of Rs 800 crore in H1 FY24 which is four times of the volumes done in H1 FY23.

Transactions like these have picked up pace following the growing demand of finance for the NBFCs to meet the strong credit requirements for consumer and personal loans in the country. That also coupled with the growing need for personal loan asset class by the banks that were eager to purchase these loan pools.

ICRA expects the pace of personal loan sell-downs will hamper at least in the near term. Since there is an increase in capital requirements now on such loans for the purchasing banks, this would thereby amplify the costs for all parties.

Abhishek Dafria, Senior Vice President and Group Head, Structured Finance Ratings, Icra said "The securitisation in the personal loan category has seen good momentum in both FY23 and FY24. So far in FY24, with about 13 to 15 originators raising funds through either the direct assignment (DA) route or through issuance of pass-through certificates (PTCs)".

He further added that though the DA transactions are likely to see a slowdown, Icra expects the preference for PTCs to continue as the same does not attract the additional capital requirement.

Personal loan pools that are being sold out through the PTC route forms about 70 per cent of the total securitisation volumes in this asset class.

“Nevertheless, seeing the regulator’s growing concern about the increase in personal loan disbursements, even the PTC transactions could be impacted for a short span if the banks decide to pause on investments in personal loan asset class to reassess the macro-environment,” Dafria mentioned.

While the securitisation in the consumer and personal loan segment may see some slowdown for the period in between. Still Icra does not foresee any material impact on the overall domestic securitisation volumes since this asset class forms only about 3 per cent of the total securitisation volumes.

Icra has maintained its estimate of about Rs 1.9 to 2 lakh crore of securitisation volumes for FY24 against about Rs 1.8 lakh crore seen in FY23 including both DAs and PTCs.

There is a possibility that the Issuance of PTCs may also benefit from the RBI recent circular as the bank borrowings to the NBFCs would carry an additional 25 per cent risk weight. This may increase the bank borrowing costs for the industry which will consequently improve the viability of PTC transactions.