Securitisation volume rose 7% to Rs 590 billion in the first nine months of this fiscal, bolstered by a 120% on-year surge in transactions in the third quarter.

The strong growth was driven by demand for non-priority sector lending (non-PSL) assets and low-base effect of the third quarter of last fiscal, which was affected by demonetisation.

Volume shrank 20% in the first half because of uncertainty over the applicability of Goods and Services Tax (GST) on securitisation transactions but sprung up once clarity emerged in the third quarter.

Banks' quest for retail credit growth, demand from mutual funds, and yield hunt by non-bank treasuries cranked up demand for non-PSL assets. For large originators, non-PSL asset-backed pass-through certificates (PTCs) fetched coupons in the range of 7.5% to 8%, or 100-150 basis points more than for PSL asset-backed instruments. For smaller originators, PTC yields are upwards of 10%.

Consequently, non-PSL transactions now contribute to around 45% of overall market volume, way above the historical ~25%. Mortgage receivables (home loans of higher ticket sizes that do not qualify as PSL) remained the preferred non-PSL asset class.

CRISIL estimates mortgage receivables account for ~70% of the overall non-PSL volume. Receivables from car loans, two-wheeler loans, consumer loans and commercial vehicle loans also drew interest from public sector banks (through the direct assignment, or DA, route), mutual funds and non-bank treasuries (through the pass-through certificate, or PTC, route).

Krishnan Sitaraman, Senior Director, CRISIL Ratings, said, ''The dynamics of India's securitisation market are changing and demand for non-PSL assets will be the driver of growth going forward.

This is healthy, and we expect the momentum to continue in the fourth quarter of this fiscal. With participation by mutual funds and non-bank treasuries increasing, newer asset classes and multi-tranche structures are making their presence felt.''

PSL securitisation, which has traditionally accounted for around 75% of volume, shrunk to ~55% due to increasing preference for priority sector lending certificates (PSLCs). Traded volume in PSLCs sizzled between April and December 2017, rising to Rs 1260 billion compared with Rs 495 billion for the whole of last fiscal.

Banks are expected to continue tapping the securitisation market to meet their PSL requirements, though to a lesser extent, as securitised assets will remain on the books for a longer period and generate income. PSLCs, on the other hand, expire at the end of each fiscal and add to the expenses of the investing bank.

Rohit Inamdar, Senior Director, CRISIL Ratings, said, ''Banks will employ a mix of PSLCs and securitisation to meet their PSL mandate. But the 'expense' nature of PSLC investments, and volatility in their pricing may discourage banks from depending exclusively on them. That's why PSL securitisation will also continue to see demand.''