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Saturday, Aug 10, 2002

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Money & Banking - Securitisation

Mortgage-backed securities begin to gain acceptance

Rukmani Vishwanath

MUMBAI, Aug. 9

MORTGAGE-BACKED securities (MBS) are finally getting their place in the sun, even if it is in part due to the huge liquidity overhang in the debt markets.

Debt markets are witnessing substantial activity in MBS, primarily propelled by fresh interest from banks which earlier had given this segment the proverbial cold shoulder.

"Through MBS, the issuing bank or finance company can make liquid its illiquid assets through the process of securitisation. While the issuers stand to gain, investors can take advantage of the interest spreads,'' said a senior banker with a public sector bank.

Currently, if a bank were to invest in a normal triple A rated paper, the yield it would receive would be around 7.30 per cent, whereas an MBS of four-year maturity offers an yield of 8.90 per cent. This means an interest spread of over one per cent for the bank.

Bond dealers contend that activity in this segment has been picking up over the past month with banks appearing to be more comfortable now with the structure of these securities than a few months ago.

"Most banks did not understand the structure of such securities before, but now they are showing more enthusiasm to invest in these papers as their spreads over G-Secs are much wider,'' said a bond dealer with a private sector bank.

Securitisation of banks' retail loans portfolio is a popular debt instrument internationally and is expected to catch on in India as well.

Initially, even credit policy liberalisations where banks were allowed assign a risk weightage of 50 per cent as compared to the earlier 100 per cent, failed to inspire confidence in this instrument.

As a result, the initial few issues met with a tepid response. Mutual funds invested to some extent, while banks kept a cautious distance.

Although HDFC's much-awaited Rs 156-crore issue in May in two tranches initially failed to live up to expectations, issues after that have been relatively more successful as more awareness of this type of instrument spread.

"At that time, the issue carried a coupon of 9.05 per cent, which was viewed as unattractive,'' said a banker.

Even though more complex instruments such as ICICI's collateralised debt offering in the form of mutual fund units are still viewed with certain amount of wariness, bankers say that it is only a matter of time before investors develop better comfort levels.

However, with the Reserve Bank of India recently issuing detailed guidelines about investing in these securities, banks have now acquired a better understanding of how to invest in these instruments, said a senior banker with a public sector bank.

Credit rating agencies such as Crisil are also propagating asset-backed securities as instruments that offer relative safety with matching returns.

The major issuers of MBS in the debt market now are Citibank, ICICI Bank, HDFC and Ashok Leyland Finance.

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