Asset-Backed Securities in India: A New Frontier for Institutional Investors

Asset-backed securities (ABS) are gaining renewed attention from institutional investors in India. These instruments could offer new sources of yield and risk diversification. For institutions seeking stable returns and exposure beyond traditional debt, the evolving ABS market in India presents real opportunity.

This article outlines what ABS are, what recent numbers and regulations show, and what institutional investors need to watch out for.

What Are Asset-Backed Securities?

Asset-backed securities are financial instruments created by pooling financial assets like vehicle loans, mortgages, leases or trade receivables. These pools are securitised and sold to investors as securities. The cash flows from the underlying assets support payments to ABS holders.

Institutional investors often look at ABS for predictable cash flows, credit enhancements, and the chance to tailor risk and return through tranching or credit structuring.

The Current State of ABS in India

India’s ABS / securitisation market remains relatively small compared to developed markets but is expanding. Here are some recent data points:

• In Q1 FY26, retail asset securitisation volumes touched ₹52,000 crore (about US$ 6.04 billion) in India. That was a year-on-year increase of around 6%, according to IBEF.
• The growth drivers include vehicle loan securitisation, microfinance loan-backed pools, and the recent entry of residential mortgage-backed securitisation transactions.

Why Institutional Investors Should Consider ABS?

Here are reasons why ABS may become more attractive:

1. Diversification: ABS allow exposure to different underlying assets (vehicle loans, mortgages, leases). This helps spread risk away from more volatile instruments.

2. Yield enhancement: Because ABS often involve credit risk and structured tranching, they may offer spreads higher than comparable rated corporate debt.

3. Regulatory tailwinds: With SEBI and RBI tightening frameworks, risk retention, minimal investment size and demat requirements, institutional investors may feel more confident about structural risk.

4. Funding cost optimisation for originators: Originators (banks, NBFCs, IIFCL etc.) benefit from converting illiquid or long-tenor assets into tradable liabilities. That improves capital efficiency and allows scaling.

What Institutional Investors Should Be Aware Of

While potential is clear, several risks and challenges require careful assessment:

• Credit risk of underlying assets: The performance of the asset pool (loan defaults, delinquencies) heavily determines returns. Market cycles and borrower risk must be assessed.

• Liquidity risk: Secondary markets for ABS or securitised debt instruments are still developing in India. Large institutional investors may find limited exit options or wide bid-ask spreads.

• Structural complexity: Tranching, credit enhancements, risk retention rules and other structural features (e.g. clean-up call options) can complicate risk analysis.

• Regulatory changes: While reforms are positive, changes over time in regulation may shift risk profiles. Keeping up with SEBI, RBI, and other regulatory bodies is essential.

• Ticket size and investor eligibility: With the proposal of minimum ₹1 crore investments and private placement limits, smaller or non-institutional investors might be excluded. Institutions need to verify eligibility and investment thresholds.

Outlook and Strategy for Institutional Investors

• Focus on originator quality: Banks, NBFCs, and other originators with strong track records, transparent reporting, and a history of managing default risk well should be preferred.

• Analyse underlying asset performance: Choose pools with good historical data, manageable asset types, diversified sectors, and appropriate maturities.

• Structure exposure carefully: Balance between senior and subordinated tranches, understand what credit enhancements (if any) are in place.

• Monitor regulatory developments: The SEBI/RBI amendments and proposals may change risk/return dynamics.

Conclusion

Asset-backed securities are becoming a serious frontier for institutional investors in India. Between rising volumes in retail securitisation, regulatory reforms to improve transparency, recent large issuances, and increasing interest from asset managers and funds, ABS is no longer just a niche.

Institutions that apply careful due diligence, understand structural risk, and align with the evolving regulations may benefit from ABS as a source of yield, diversification, and efficient allocation of capital.

This could mark a shift in fixed income and structured finance strategies of institutional investors in India. ABS may well be an important component of portfolios in the coming years.