Jan 30, 2023
How Does The ABS Market In India Encourage Auto Loans Market Growth?
How Does The ABS Market In India Encourage Auto Loans Market Growth?
According to RBI, securitization refers to transactions in which credit risks of assets are redistributed as tradable securities using repackaging schemes. In the April-June quarter of FY23, the securitization volume has gone up by 70% to reach Rs. 35,000 crores. The increasing economic activity is an important contributor to this major surge.
What Is The Meaning Of ABS?
Asset-Backed Security (ABS) is a financial investment option secured by underlying assets. The asset pool generates cash flow from rentals, loans, receivables, or credit card balances and becomes a bond or a note. ABS provides security for investors, providing a fixed-rate income until maturity. The first-of-its-kind program was launched in India based on the auto loan portfolio of Citibank.
Following the popularity of ABS, many other Indian banks joined the list by securitizing their auto loan portfolio.
Understanding ABS And How They Work?
Using ABS, lenders can raise more money by securitising their assets pool. The underlying ABS assets can’t be sold separately. That is why financial institutions securitise assets to create new financial investment products. It helps in reducing credit risk. With improved financing for the lenders, they can reach out to more borrowers, benefiting them.
Auto loans are proffered for ABS because they allow for increased cash flow through innovation. For example, the sale of toll roads, solar energy, aeroplane landing rights, or any other revenue-generating event can be used as collateral for ABS.
Investors can increase their revenue stream by investing in ABS. They can take advantage of many income-generating assets that are not easily available with other investing options.
ABS and Specific Focus On Auto Loans
The growing ABS market, powered mostly by auto loan portfolios, continues to increase. Some of the reasons for this surge are:
Role of international banks in the Indian auto loan market
New features such as hire purchase finance and instalment added to auto loans to facilitate securitisation
Assured safety with the title over assets
Growth in the vehicle resale market that can benefit financiers during delinquencies
The increasing inflation rates, stringent monetary policies and global economic slowdown contributed to a lower domestic GDP. As a result, the auto loan-based ABS was down last year. However, Fitch forecasts estimate that India’s GDP can grow by 6.2% in FY 23-24, showing signs of economic growth.
The deterioration in auto loan ABS transactions will be contained due to the government’s plan to improve infrastructure. It will increase fleet utilisation rates, resulting in increased auto loans. The Fitch forecasts conclude that Indian ABS transactions based on auto loans will be stable.
