India moves to deepen junk debt market by allowing bad loan securitisation
The Reserve Bank of India (RBI) said last week it would now permit market-determined securitisation of stressed assets, besides those loans where repayments were on track.
The volume of securitised standard loans jumped 25% to 2.3 trillion rupees ($26.74 billion) in 2024-25, data from India Ratings and Research showed.
Pooling together stressed retail and personal loans will allow banks to lighten their balance sheet and give investors high-yield investment options.
It will also draw new investors, broadening the market and giving it more liquidity and depth, said Hari Hara Mishra, CEO of the Association of ARCs (Asset Reconstruction Companies) in India.
The debilitating corporate bad-loan cycle in the previous decade took years to clean up and pushed banks to shift focus to the unsecured retail segment, resulting in higher delinquencies. Overall, the sector's bad loans ratio is expected to rise to 3% by March 2026 from a 12-year low of 2.6% in September.
High-yield investors, however, are interested in both stressed corporate loans and similar small-ticket loans, said Nachiket Naik, head of private credit at Axis Asset Management.
Personal loans and credit card debt accounted for approximately 52% of fresh bad loans in banks' retail portfolios between April and September last year, RBI data showed.
So far, the lack of options has forced banks to sell these loans to ARCs at a 90%-95% haircut.
Now, banks not only get the option of securitising these loans but the lure of higher returns from such issues will also attract investors, including FPIs and private credit firms.
The expected yield of such a pool of stressed assets will be higher than that of a junk or high-yielding bond and akin to what a distressed fund expects from its investments, said Ajit Velonie, senior director at Crisil Ratings.
U.S. and European distressed debt funds are drawn to high-yield opportunities in emerging markets such as India, said Sankar Chakraborti, CEO of Acuite Ratings and Research.
However, there are some challenges, including the pricing of such securities.
"The price determination of NPA securitization deals is influenced by various granular factors such as asset quality, recovery rate, historical probability of defaults of the underlying asset classes and investor sentiments," noted Manisha Shroff, partner at law firm Khaitan & Co.
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