India 2007: India avoids US sub-prime impact
The Indian structured finance market has unintentionally avoided being adversely affected by the global nervousness that the US sub-prime crisis called. Issuance volumes are growing, albeit slowly, and the investor base is showing signs of expanding amid increased enthusiasm among foreign investment banks for Indian structured paper.
India’s structured finance market has been in a state of inertia since January 2006 after the Reserve Bank of India (RBI) announced restrictive regulations. So when the world of structured finance trembled under worries of a secondary impact of the US sub-prime crisis, there was hardly a hint of nervousness in the Indian market.
“The market has been in a hole for a long time and foreigners have not been able to get their hands on Indian structured paper because the paper is still not recognised under law as securities which can be listed,” said one banker. “This sole reason ensured that there is hardly any impact on the local market because of the troubles in the US.”
According to ICRA, issuance volumes grew by 44% in fiscal year 2006–07 (April–March) to Rs370bn (US$9.02bn). However, this is a deceptive statistic because most deals were done through direct assignment of loan pools to investors and not through public securitisation transactions.
Bankers said issuance was still growing and comprised mainly transactions backed by loan pools which were predominantly single corporate loans so the size of the deals done is small (about US$50m–$150m).
The buyers of these notes issued against loan pools are mostly mutual funds and insurance companies and they hardly have any global exposure to be impacted by the US sub-prime issue.
So when globally bankers were worried about the future of securitisation, Indian bankers were actually hoping to see the market progressing further.
In late June ICICI Bank executed the largest securitisation deal in India and bankers were expecting more such large issuance to follow. The reason for the successful execution was demand from a large foreign investment bank, which, in turn, raised the possibility of more such big offers.
The bank with a presence in India is rumoured to have bought Rs18.6bn (US$461m) of pass-through certificates (PTCs), issued by ICICI Bank. The PTCs were backed by personal loans and small-ticket personal loan receivables originated by ICICI Bank.
The deal’s completion uncovered an increased appetite among foreigners for Indian ABS, greatly expanding the investor base for such issuance.
The rise in foreign bank appetite for Indian ABS meant that originators could now sell larger and a more diverse number of loan pools to a sophisticated investor base that is looking to churn its investment portfolio.
An enlarged investor base also gave scope for greater structuring, a fact that was amply reflected in the uniqueness of the ICICI transaction.
The Indian Retail ABS Trust 92 offered 31 tranches sized between Rs203m and Rs1.2bn, and they carried tenors from three months to four years. Twelve of these tranches were rated A1+ and 19 were rated Triple A by ICRA.
Although pricing was not disclosed, the spread was rumoured to be at least 100bp more than on a similarly rated and tenured corporate bond.
The pool benefited from a credit enhancement in the form of credit collateral of 20.6% of the initial pool principal, subordination of excess interest spread and liquidity support of 5.25% of the initial pool. About 80% of the pool is personal loans while the balance is small-ticket personal loan receivables.
ICICI Bank’s personal loan portfolio has experienced a rise in delinquencies in recent months with the 180-plus-day arrears increasing to 4.01% in April from 2.71% in January 2006. The 90-plus-day delinquencies in the small-ticket personal loan receivables portfolio as of April stood at 13.75%.
The rise in the risk quotient of Indian loan collateral is not necessarily a cause for alarm. The pools are relatively young and banks have yet to go through a full lending cycle on most pools. Empirical evidence on lifetime losses is yet to emerge. In any case, the addition of a liquidity support facility of the transactions reduces investors’ risk.
“The purchase showed that the market has transformed from being one where an originator had to sell PTCs to a broad range of investors to where foreign banks are approaching originators to buy deals wholesale with an aim to sell it down to investors later,” said one banker. “This new approach is sure to invigorate the market and encourage more originators to look at bigger-sized transactions.”
Bankers however did not expect runaway growth in issuance volumes and see the current state of global nervousness curbing investor enthusiasm only to well-structured deals and portfolios with reasonably healthy historical performances.