Impact of COVID-19 crisis on securitisation transactions: An Indian perspective

Impact of COVID-19 crisis on securitisation transactions: An Indian perspective

By Harsha Nemani, Prabhav Srivats and Rahul Panigrahi, Northern Arc Capital

The COVID-19 pandemic has brought unprecedented widespread national lockdowns, social distancing measures leading to closure of many businesses. The resulting economic damage is one of the strongest shocks in recent times, impacting the operations of several major industries. This paper investigates the impact of COVID-19 crisis on securitisation transactions in the Indian context by analysing the collections and recoveries across asset classes post Covid 1.0 which was between March 2020 to August 2020 and during Covid 2.0 between April 2021 to June 2021. The economic activities across the country were minimal due to strict lockdowns in the mentioned time periods. The paper also peeks into the measures taken by the investors to protect their interests during Covid 1.0, and the structural changes observed in the transactions post Covid 1.0.


Data used for the analysis

All securitisation pools considered for this analysis are static pools and some of the pools have matured during the period for which this analysis is presented. As shown in Exhibit 1 securitisations with underlying assets of Microfinance loans constituted the most followed by vehicle finance and small business loans.

Moratorium percentage1 on loan repayments

In order to cushion the impact of the first wave of Covid on the Indian economy and the reduced earning profile of retail borrowers, Reserve Bank of India (RBI) had announced a moratorium policy on March 27, 2020. RBI has permitted all commercial banks, cooperative banks, all-India Financial Institutions, and Non banking Finance Companies (NBFCs) including NBFC-MFIs (Micro Finance Institutions) and HFCs (Housing Finance Companies) to allow a moratorium of three months on payment of instalments as on March 1, 2020 and all instalments falling due during the period March 1, 2020 to May 31, 2020.

The moratorium policy was broadly available to borrowers who were not in default for 90 days as of February 29, 2020, and at the request of the borrower. The policy allowed lenders to maintain stand-still on asset classification for loans under moratorium while giving borrowers a reprieve on repayments. However, for customers categorised as NPA as on February 29, 2020, the days-past-due shall continue to be calculated as earlier. The first moratorium policy was applicable from March 2020 to May 2020, and it was later extended till August 2020.

 Moratorium trends across asset classes

Microfinance borrowers, given their higher vulnerability to economic shocks availed the benefit of moratorium the most. This was also driven by the higher dependence on field collections and cash repayments prevalent in the sector which was impacted by the lockdown restrictions because of the Covid 1.0. Around 96% of the borrowers in the sector availed moratorium in April 2020 and 89% of borrowers availed moratorium in May 2020.

Small business loan borrowers (mostly unsecured) were the next biggest beneficiary. Vehicle finance loans were also impacted but much less than other sectors probably because of mobility for essential services was allowed during the nation-wide lockdown of April to May 2020 and may be due to the given secured nature of the financing. As the lock-down restrictions were relaxed starting June 2020 the number of borrowers who availed moratorium started coming down from the peak levels of April and May 2020.

Collection efficiency2 trends from September 2020

This section analyses the trends in collections after the end of the moratorium period as the lower demand for collections during the moratorium period made the analysis of collection efficiency inconsistent for comparison across the pre and post moratorium periods. Exhibit 3 shows the trends in collection efficiencies from September 2020 to June 2021 across asset classes.

Small business loans (SBL) and vehicle finance (VF) sectors have similar trends, with collection efficiency slowly picking up from 76% and 79% respectively in September 2020 and steadily improving to 85% and 86% in March 2021. However, the collection efficiency dropped in the months of April 2021 and May 2021 due to Covid 2.0 and remained at 71% and 75% as of June 2021 for SBL and VF respectively.

Microfinance sector has clocked 72% collection efficiency in September 2020. This can be attributed to higher moratorium levels in this asset class and there by losing face-to-face interaction with customers for a long time which is crucial in this industry to maintain higher collection efficiency levels. The improvement in the collection efficiency was seen in quarter ends of December 2020 and March 2021. The collections again dipped in the months of April 2021 and May 2021 due to state-wide lock downs imposed during Covid 2.0 and as of June 2021 the industry has a collection efficiency of 79%.


Recoveries in different DPD buckets across asset classes

Recovery rate3

Recovery rate pertains to delinquent borrowers and indicates the percentage of borrowers who have stayed in the same delinquency bucket or moved to a softer delinquency bucket compared to the delinquency status in the previous month. These are plotted for different buckets to differentiate behaviour of regular and overdue customers. The recovery rate gives an idea of the curing of loans in each bucket and is calculated in similar fashion as shown in Exhibit 4, Exhibit 5 and Exhibit 6 for all buckets.

Exhibit 4, Exhibit 5 and Exhibit 6 show the recoveries across different buckets in microfinance, vehicle finance and small business loans. Similar to collection efficiency trends, recoveries in all the bucket across all the asset classes have similar trends.

One major commonality seen in all the asset classes is that the recovery in September 2020 from all the DPD buckets is high and then dropped to lower levels. This can be attributed to higher savings from March 2020 to August 2020 which might have resulted in the payment of one instalment during September 2020 for higher DPD customers. Moreover, moratorium ceased to exist from September 2020 but localised lockdowns were still present which made it even more difficult for higher bucket customers to recover post September 2020.

However, as the lockdowns were relaxed across geographies, the economic activities picked up pace and hence significant recoveries were observed between February 2021 and March 2021. However, the recoveries across asset classes started showing a downward trend from April 2021 with Covid 2.0 and across all delinquency buckets all-time low recoveries between September 2020 to June 2021 were observed in May 2021 but picked up in June 2021.


Structural amendments to existing transactions to mitigate the impact of Covid 1.0

The RBI notifications allowing moratorium to the underlying assets in the securitisation transactions did not specify a set criteria on how the same would be applicable to the pass through certificates (PTC) papers held by various investors. With the underlying assets under moratorium, moratorium was also required to be provided on the PTCs to avoid significant credit enhancement utilisation in the transactions during the moratorium period. The PTCs were granted moratorium by most of the investors and as a result, the tenure for these transactions was extended by five to six months.

Among the transactions analysed, extension of maturity was approved by the investors for most of the transactions and some modifications to the transactions’ waterfall mechanism were also proposed for the moratorium period and received approval of investors.

Typically, Indian securitisation transactions have a consolidated waterfall that allows usage of cash flows from the underlying pool to pay interest and principal on the senior notes followed by payment to the junior note. The two popular waterfall mechanisms are mentioned in detail below:

  1. Timely Payment of Interest and Timely Payment of Principal (TITP): The payment of interest and principal on a timely basis are those transactions where in case of any shortfall, excess interest spread followed by cash collateral is used to ensure timeliness of payments. Typically, when the senior note is outstanding, the junior note receives interest on an expected basis and can start receiving principal on a ‘due’ basis and use the cash collateral only on the full redemption of the senior notes.
  2. Timely Payment of Interest and Ultimate Payment of Principal: In these structures which have gained prominence in recent times in India, only the interest is promised on a timely basis (and has access to credit enhancement) while principal is paid on an ‘expected’ basis (and has access to credit enhancement if remaining outstanding only on maturity date).

Elements of restructuring of the securitisation notes

In agreeing to extend the tenure of the transaction by the period for which moratorium was provided to underlying assets, investors also proposed a few concessions from the originator:

  1. Default tagging removed for period of moratorium: Originators and investors agreed to change the timely interest payment and principal payment (in case both were timely) to Ultimate Payment structures for the period of the moratorium.
  2. Non-usage of reserve funds (cash collateral): As an implication of point 1 above, in most transactions, the usage of reserve funds was not required during the moratorium period. This allowed the transactions sufficient internal liquidity which could be made use of in case collections from underlying pool did not improve post the moratorium period.
  3. Excess interest spread: In most structures, the excess interest spread flows out to the originator on a ‘use-it-or-lose-it’ basis every month after meeting all payment requirements. However, investors took two routes to application of EIS during moratorium: (i) EIS was completely locked out from the originator and was used to make prepayments on the senior notes in approx. 55% of transactions; and (ii) EIS was trapped in the Collection and Payout Account i.e. the account opened and maintained by the Trustee for collections from originator on the underlying loans and making payouts to investors for future usage and was neither used for prepayment nor flowed back to originator. This accounted for 45% of transactions.
  4. Waterfall mechanism: Investors took two different routes towards the application of the waterfall mechanism: (i) Usage of all cash flows for prepayment: All cashflows were applied for the prepayment of the senior notes and interest was accrued for the period of the moratorium; and (ii) Usage of cash flows to pay interest and principal: All cash flows were applied for payment of accrued interest to the extent possible and then for repayment of senior notes followed by prepayment if there was any surplus left.
  5. Subordinated notes became deeply subordinated: Another implication of the above changes was that subordinated notes which form between 2%-5% of the capital structure and have monthly expected interest payouts, have been restructured such that interest to subordinated notes were being accrued and expected to be repaid only after senior notes were paid in full.
  6. Reversion to the pre-moratorium structure after moratorium: All transactions were to go back to the original terms pre moratorium such as timeliness of payments with ability to use reserve funds and allowing excess interest spread to start flowing back to the originator.


Response of investors in Indian securitisations to the Covid crisis

In light of their experiences of asset class performances during Covid 1.0 (March 2020 to August 2020) and given that recovery in performance and collection efficiency happened only by December 2020, investors in securitisation transactions took a number of measures to strengthen transaction structures:

  1. Turbo structure: Some investors had a preference for usage of all excess cash flows or EIS to be used for prepayment of the notes.
  2. Trapping of EIS basis performance: In many transactions, it was also observed that while the excess interest spreads were paid back to the originator upon satisfactory performance of the pool, upon occurrence of certain performance-based triggers, the excess interest spreads were used to prepay the senior tranches on a monthly basis. Some of these trigger events included the PAR 30 or PAR 90 levels of the pool going beyond a threshold level or the rating of the originator/PTCs going beyond a pre-defined level.

Both these structure variants ensured that the payments to investor would be accelerated upfront/upon occurrence of the trigger event which would shorten the tenure of the PTCs thus minimises the exposure at default for the investors.

Option 1 was used for asset classes that were more vulnerable to the impact of Covid like microfinance loans. MFI securitisations without any of the above structural mitigants reduced from 88% before Covid to 50% after Covid.

Small business loans (largely unsecured) securitisations also made use of the structural mitigations discussed above though to a lesser extent than microfinance loans.

While we have observed that the trend in the MFI and SBL sectors has been towards structures wherein excess interest spread would be used for prepayment of PTC A1 with/without occurrence of any trigger events, a similar trend is not observed in the vehicle finance space. The reason for the same could be the relatively longer tenure of the transactions in this segment which provides ample time for the contracts in the pool to correct themselves from an event like Covid and the secured nature of the loans thus providing better recovery prospects post default.


The pandemic led to disruption of livelihood and businesses across the world. This paper tracks the benefit of the regulatory forbearance that borrowers took across asset classes. It also tracks the significant drop in collection efficiency in the face of an extreme event such as the pandemic. Also, the analysis clearly highlights the fact that across asset classes, the recovery rate across delinquency buckets have maintained their relative risk rank ordering and the time it takes for the asset classes to recover in the face of an extreme event like the current pandemic albeit worsened again by the second wave.

This paper summarises the response of investors to the regulatory forbearance provided to cushion the impact of pandemic on small and marginal borrowers. Investors, wary of asset class performance also changed investment strategies by bringing in more pro-active structures that allowed them faster repayments in the eventuality of lower collections.

The risk mitigation measures were also calibrated to the level of vulnerability of each asset class and helped originators access funds during the second phase of Covid with the Indian securitisation market growing at more than 200% y-o-y in Q1FY22.

On account of these measures, we have not seen investors facing significant defaults till date. However, impact of any further Covid waves in future leading lock downs or other constraints on the economic activity needs to be seen.



  • RBI Notifications on Moratorium –;;; NT2455D86E6F80D9D4BC29C0DFAA43D76D9A4.PDF
  • ICRA Structured Finance | Note on Q1 securitisation volumes –
  • Microfinance recovery analysis: Using time series of Northern Arc portfolio data, World Bank Blog, 2020 – Kshama Fernandes.



1 Moratorium percentage: This is the ratio of borrowers who availed moratorium in a particular month to the total number of live borrowers in that particular month.

2 Periodic collection efficiency: This gives the percentage of current demand collected for a month excluding overdue collections and prepayments. Periodic collection efficiency of portfolio = (? Demandi ni=1 –? Overduei ni=1)/ ? Demandi ni=1), where

  • Demandi is the demand for customeri
  • Overduei is overdue of customeri
  • n is total number of customers

3 Recovery rate 1-30 bucket = p1-30 bucket/n1-30 bucket, where:

  • p1-30 bucket is number of customers who have paid one or more instalments in 1-30 bucket
  • n1-30 is total number of customers in 1-30 bucket



Harsha Nemani

Senior Associate – Structured Finance and Products

Tel: +91 9384835100



Prabhav Srivats

Associate Director – Risk Analytics and Modelling

Tel: +91 9176087018





Rahul Panigrahi

Associate Director – Structured Finance and Products

Tel: +91 8657563495




Northern Arc Capital

10th Floor-Phase 1, IIT-Madras Research Park

Kanagam Village, Taramani

Chennai 600113, India

Tel: +91 44 6668 7000



Northern Arc Capital (previously known as IFMR Capital) is a platform in the financial services sector, with a business model diversified across offerings, sectors, products, geographies and borrower segments. It focuses on addressing a wide spectrum of the credit requirements of under-served households and businesses through a sectoral approach. It operates in focused sectors including microfinance, MSME finance, vehicle finance (includes commercial vehicle and two-wheeler finance), consumer finance, affordable housing finance and agricultural supply chain finance.

Since the inception of the platform, it has cumulatively raised over Rs.950.00bn in funds for its clients, executed over 900 structured finance transactions and gathered over 22 million data points on customer repayment behaviour. It operates with a risk management framework that uses a combination of proprietary quantitative data analytics based on over 22 million unique data points and qualitative field-level insights that aid credit assessment and monitoring.