omicron: Fears over omicron may impact retail securitisation volumes: Icra

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Investors may turn cautious when purchasing retail securitised assets of non-banking financial companies (NBFCs) and housing finance companies (HFCs) due to concerns over spread of omicron variant of COVID-19 which could bring back nationwide lockdowns according to ratings firm Icra.

Loan collection abilities of NBFCs and HFCs could be impacted. If the Omicron variant disrupts business activities and results in even temporary lockdowns, the securitisation volumes could be severely affected for the rest of the year as the investors would prefer to wait for the threat to subside. The NBFCs and HFCs may again reduce their disbursements the way one saw during the previous periods of lockdowns. The securitisation volumes in FY’2023 could also be affected by lower disbursements as the availability of retail loans for securitisation would also decline, Icra said.

“While securitisation volumes had seen a healthy improvement in the current year so far as compared to the previous year, the volumes are still only about 40% of the pe-Covid period ” said Abhishek Dafria, vice president and head – structured finance ratings at Icra. ” The threat of spread of Omicron variant is again a sign of worry. These are still early days to assess its impact and we hope that the vaccinations are effective against the new variant too.” Some state governments may choose to take early precautions and reintroduce measures adopted in the past, such as localised lockdowns or night curfew, which would also result in negative sentiments as far as securitisation is concerned, according to Icra

Securitisation of secured asset classes, such as mortgage-backed loans, vehicle loans, gold loans etc have been preferred over unsecured asset classes such as microfinance or SME loans during the post COVID period. Collections have bounced back faster in the secured asset classes compared to unsecured asset classes. For the first half of FY’2022, almost 85% of securitisation volumes constituted of secured loans, according to Icra.

If the worry around the Omicron variant grows, the unsecured loan financiers would be worst affected in the securitisation market as the borrowers have a higher probability to miss the loan repayment for an unsecured loan during periods of economic stress. Such financiers would find it difficult to find investors for their securitised pools or else would have to offer higher credit enhancements which would increase the cost of doing the transaction.

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