A bank that provides financing for a car or home loan does not necessarily retain the loan on its books until it is fully repaid. The bank may aggregate several loans and the loan pool is transferred to an SPV, which issues securities. Then the loan pool is sold as one single financial instrument to the investors. Such a practice is known as securitisation and the resultant instrument that arises from this is known as Asset Backed Security (ABS). This article discusses ABS and all you need to know before investing.
Example of an Asset-Backed Security
Consider that an NBFC had disbursed 10,000 loans amounting to ₹500 crore for purchasing vehicles. Rather than recovering the amounts after several years, the NBFC combines all these loans and sells them to a trust. The trust then issues asset-backed securities (ABS) to investors, with the underlying vehicle loan receivables serving as collateral. Investors receive payments from the EMI collections made by borrowers.
Every investor who purchases these securities gets a portion of the EMI payments. Even if there is some default from some borrowers, this does not impact the entire lending institution but the losses get diluted over the portfolio of loans. This is a basic example of an auto loan ABS, which is one of the most frequently issued in India.
How Do Asset-Backed Securities Work?
The process behind an ABS follows a clear sequence:
Origination
A bank or NBFC gives out loans to individuals or businesses (auto loans, personal loans, gold loans, and so on).
Pooling
Many similar loans are grouped together into one pool based on shared features, such as tenure or borrower profile.
Sale to an SPV
The pool is sold to a Special Purpose Vehicle (SPV) or trust, which keeps it separate from the originator's own balance sheet.
Issuance
In many Indian securitisation transactions, the SPV issues Pass-Through Certificates (PTCs) to investors.
Credit rating
Agencies such as CRISIL, ICRA, or CARE rate the securities based on the quality of the underlying loans.
Repayment
As borrowers repay their EMIs, the SPV passes this money to investors, minus a small servicing fee.
This structure keeps the loan and the loan repayments separate from the original lender, which is what makes ABS a distinct investment product rather than a direct loan.
Key Features of Asset-Backed Securities
Here are some key features of asset-backed securities:
Backed by real assets
Every ABS is supported by a pool of loans or receivables, not just a company's promise to repay.
Fixed or floating income
Investors receive periodic payments, usually monthly or quarterly, based on EMI collections.
Credit-rated
Independent agencies assess default risk and assign ratings before issuance.
Tranching
Securities are often split into senior and subordinate portions, with investors holding senior portions being paid first.
Bankruptcy remote
Because the SPV holds the assets separately, the originator's financial troubles do not directly affect the pool.
Tenure varies
ABS can range from short-term instruments to longer tenures depending on the underlying loans.
Types of Asset-Backed Securities
Below are the types of asset-backed securities:
Auto Loan ABS
Backed by car and two-wheeler loans, this is one of the most widely issued categories in India.
Personal Loan ABS
Backed by unsecured personal loans, carrying relatively higher risk due to the absence of collateral.
Mortgage-Backed Securities (MBS)
A related category backed by home loans. In late 2025, India saw its first residential mortgage-backed securitisation by the RMBS Development Company, marking an early step for this segment in the country.
Credit Card Receivables ABS
Backed by outstanding credit card dues, though this segment is smaller in India compared to markets abroad.
Microfinance and Gold Loan ABS
Backed by small-ticket loans given to individuals or small businesses, often through NBFCs and microfinance institutions.
Why are Asset-Backed Securities Created?
Frees up capital for lenders
Banks and NBFCs can lend more once existing loans are sold off their books.
Manages risk
Lenders reduce their exposure to default by passing on a portion of the loan pool to investors.
Diversifies funding sources
Originators raise funds through capital markets rather than relying only on deposits or borrowings.
Meets regulatory requirements
Depending on the transaction structure and applicable RBI regulations, certain securitisation transactions may be considered for Priority Sector Lending (PSL) treatment.
Creates investment options
ABS gives institutional and retail investors access to loan-based income that would otherwise be hard to obtain directly.
Key Participants in an ABS Transaction
An ABS transaction involves several parties working together to originate, structure, and distribute the securities.
Originator
The bank or NBFC that creates the original loans and sells the pool to the SPV.
Special Purpose Vehicle (SPV)
A separate legal entity, usually a trust, that buys the loan pool and issues securities to investors.
Servicer
Often the originator itself, responsible for collecting EMIs from borrowers and passing them to the SPV.
Credit Rating Agency
Firms such as CRISIL, ICRA, and CARE assess the pool and assign ratings to help investors judge risk.
Trustee
Oversees the SPV to ensure investor interests are protected throughout the life of the transaction.
Investors
Banks, mutual funds, insurance companies, and increasingly, retail investors through bond platforms.
Benefits and Risks of Investing in ABS
Here are the key benefits are risks of investing in ABS.
Benefits
- Regular income from EMI collections
- Diversification away from equities and traditional bonds
- Access to rated, structured debt instruments
- Exposure to a pool rather than a single borrower
Risks
- Prepayment risk if borrowers repay loans early
- Default risk if borrowers stop paying
- Limited liquidity in the secondary market
- Complexity in understanding the underlying pool
Key points to keep in mind:
- Ratings help, but they are not a guarantee against loss.
- Senior tranches are safer but offer lower returns; subordinate tranches offer higher returns with higher risk.
- Read the offer document carefully, as pool composition varies between issues.
- Check the track record of the originator and servicer before investing.
Asset-Backed Securities in India
The retail asset securitisation transactions in India were recorded to be ₹52,000 crore in Q1FY26, which witnessed a growth of six percent year on year. On 31st March 2026, the total amount of Securitised Debt Instruments (SDIs) was recorded to be ₹5.06 lakh crore out of which ₹53,881 crore was traded on the stock exchange.
Regarding regulation, the SEBI made some changes in the SDI regulations in May 2025, streamlining its guidelines according to RBI guidelines on securitisation. These amended regulations also provide some provisions regarding concentration of pools. The rules mandate that the borrower should not exceed 25% of the pool assets, except where SEBI grants an exemption from this requirement. In addition, RBI is trying to expand the scope of an originator by issuing some directions under which the concept of securitisation is being extended to institutions such as EXIM Bank, NABARD, SIDBI, NHB, and NaBFID.
How to Invest in Asset-Backed Securities
In India, retail investors can invest in ABS primarily through OBPPs that are registered with SEBI and offer Pass-Through Certificates for investments directly. Certain mutual funds also have ABS as a part of their debt or credit risk portfolio for indirect investment by retail investors who don’t have to choose the ABS individually.
Investors should review the credit ratings, type of loan, duration, and minimum investment before investing in structured notes as some of these notes have high minimum investments for institutional clients. Reading the offer document and understanding who the originator and servicer are can help you assess the quality of the pool. As with any debt instrument, it is vital to match the tenure and risk level of the ABS with your own financial goals.
Conclusion
ABS provides investors an investment avenue through which they could earn returns by investing in the loan pool like car loans, consumer loans, and mortgages, and not lend money individually. The risks in these securities are diversified amongst multiple borrowers, with each security having independent credit ratings for helping investors make choices. In India, the market is evolving, and regulators continue to enhance transparency and accessibility. To the retail investors, ABS can be an option to diversify their debt investment portfolio, but only after carefully studying the characteristics of the pool, the credit rating, and liquidity.
FAQs on Asset-Backed Securities
Are Asset-Backed Securities safe for retail investors?
ABS are not entirely risk-free. Their safety depends upon the quality of the underlying loan, credit rating, and the tranche into which they are invested. Senior tranches are relatively less risky than subordinate tranches.
Who issues Asset-Backed Securities in India?
The Banks, NBFCs, or Housing Finance Companies usually create the loan pool, which is subsequently created as securities by a trust/SPV, with the help of investment banks.
Can retail investors invest in Asset-Backed Securities?
Yes, the retail investors can invest in Asset Backed Securities using SEBI registered Online Bond Platform Providers, although some structured issues involve a higher minimum investment requirement.
How do credit ratings affect Asset-Backed Securities?
Credit ratings indicate the creditworthiness and risk level of an Asset-Backed Security. Higher-rated ABS typically attract more investors and can be issued at lower interest rates, while lower-rated ABS may offer higher yields to compensate for greater default risk.
Are Asset-Backed Securities suitable for long-term investing?
This depends on the tenure of the underlying loan pool. Auto loan ABS tend to be shorter-term, while mortgage-backed securities can suit investors with a longer time horizon.
Disclaimer:
The information contained in this newsletter (“Newsletter”) is for general informational purposes only. Northern Arc Capital Limited (“Northern Arc”) does not make any warranties about the completeness, reliability, and accuracy of this information. Any action you take upon the information contained in this Newsletter is strictly at your own risk, and Northern Arc will not be liable for any losses and damages in connection with the use of our Newsletter.
The data included in this Newsletter has been obtained from sources that are believed to be reliable and accurate at the time of publication. However, Northern Arc does not guarantee the accuracy or completeness of any information, nor does it assume any responsibility or liability for any errors or omissions therein. Any opinions expressed herein are subject to change without notice and Northern Arc is under no obligation to update or keep current the information contained in this Newsletter.
This Newsletter is not intended to constitute, and should not be construed as, investment advice or a recommendation to purchase, sell, or hold any security or to engage in any investment strategy or transaction. Readers should not rely solely on the information provided in this Newsletter for making investment decisions and should conduct their own due diligence or seek the advice of a qualified professional.
The content of this Newsletter is for informational purposes only and is not a solicitation or an offer to buy or sell any securities or financial instruments. Northern Arc is not responsible for any investment decisions made by the recipients of this Newsletter. Readers should take independent financial advice from a qualified professional in connection with, or independently research and verify, any information that is provided in this Newsletter and wish to rely upon, whether for the purpose of making an investment decision or otherwise.
Northern Arc and its affiliates, directors, employees, and agents expressly disclaim any and all liability for any direct or indirect losses, damages, or expenses of any kind arising out of or relating to the use of this Newsletter, including but not limited to, any losses related to the accuracy, completeness, timeliness, or reliability of such information.
This Newsletter may contain forward-looking statements that are based on current expectations, estimates, forecasts, and projections about the markets in which Northern Arc operates, as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
This report is intended solely for the recipient and is not for further circulation. Any distribution, modification, reproduction, or disclosure of the contents of this Newsletter, in whole or in part, without the prior written consent of Northern Arc, is strictly prohibited.