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. 

How Can Tartan Help In Verification For Quicker Credit Application Processing By Lenders?

The commercial vehicle loan market in India is at Rs. 5 lakh crores. The collection efficiency of CV pools remains above 90% in India. Financial institutions have a lot more to gain by disbursing more auto loans. A company like Tartan can help banks and NBFCs to create customised auto loan products that can be useful in securitisation. 

The automated and quick credit assessment offered by Tartan will help financial institutions to reach underserved markets. By making auto and commercial loans easily accessible, ABS offerings can be vastly improved. Instead of relying on traditional credit evaluation, digital banks must move towards digital transformation with Tartan’s help.

Conclusion

The performance of CV-based ABS securitisation depends on fuel prices, freight rates, and demand for fleets due to monsoon conditions. When there is an increasing need for auto loans, banks should take advantage of it and acquire new customers with competitive products. By expanding the market reach with help from Tartan, the stable market of ABS can be used to reduce credit risks for the banks. 

About Tartan

Tartan is a full-stack verification API company that provides  consent-driven employment and income verification with payroll connectivity. We provide real-time employment verifications and KYC-related verifications. We automate  creditworthiness assessment and ensure accurate risk evaluation with over 150+ accurate and verified data points.