Context:
The Reserve Bank of India (RBI) has allowed market-driven securitisation of stressed assets, expanding beyond standard-performing loans. This move is expected to attract foreign portfolio investors (FPIs) and private credit funds, adding depth to India’s underdeveloped high-yield (junk) debt market.
Key Highlights:
- Policy Update: RBI permits lenders to bundle non-performing or stressed loans into tradable securities, opening new avenues for resolution.
- Volume Trend: Securitisation of standard loans reached ₹2.3 trillion in FY25, up 25% YoY (Source: India Ratings).
- Investor Appeal: FPIs, distressed debt funds, and private credit players are expected to be drawn by high-yield opportunities.
- Loan Focus: Personal loans and credit card dues made up 52% of new NPAs in retail lending between April–September 2024.
- Bank Strategy Shift: Banks can now securitise retail and SME stressed assets, reducing the need to sell to ARCs at steep 90–95% haircuts.
- Expected Yields: Yields from such pools are higher than junk bonds, aligning with expectations of distressed asset investors.
Benefits:
- Balance Sheet Relief: Enables banks to offload bad loans and manage capital more efficiently.
- Deeper Debt Market: Encourages new investor classes and boosts liquidity in the stressed asset space.
- Alternative Resolution Path: Adds to existing options like sale to ARCs or one-time settlements.
- Retail Risk Diversification: Helps distribute unsecured retail lending risk across multiple investors.
