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Priya Nair

Mumbai, Jan. 1 One segment of the Indian financial industry that saw huge growth in 2007 was the securitisation market. This market is poised for higher growth in the years to come, provided restrictions are eased and more players are allowed to enter.

In a securitisation deal, assets such as auto loans, personal and construction loans are pooled together and hived into special investment vehicles, which are bought by investors. While banks and NBFCs sell the assets, the investors could be other banks, insurance companies, pension funds and mutual funds.

Banks had started securitisation as a tool to churn their loan portfolios, but now they may actively look at it as a tool to free up their capital, say industry experts.

The securitisation market has seen growth in both volumes and size of issuances, partly due to factors like new guidelines on credit derivatives and NPA ratings. Post the RBI guidelines released in February 2006, there was also a change in the composition of the asset categories.

While 2006 saw a larger share of retail loans being securitised, 2007 saw the emergence of a major asset category in corporate loans being securitised through single loan selldowns. (Single Loan Selldowns or SLDs are transactions where loans to corporates get assigned to a trust, post which the trust issues certificates which are bought by MFs.)

According to an industry estimate, the total issuances of securities in the period January 1-October 31, 2007 were at Rs 46,930 crore. Of this asset backed securities (ABS) were to the tune of Rs 26,540 crore (56 per cent), retail mortgage backed securities (RMBS) – Rs 2,100 crore (4 per cent), single loan sell down - Rs 17,840 crore (38 per cent) and others – Rs 4,400 crore (9 per cent).

Another estimate puts the issuances in the first half of this fiscal at Rs 17,150 crore, against Rs 36,960 crore in 2006-07.

According to the Reserve Bank of India’s figures, the book value of total amount of assets acquired by securitisation or reconstruction companies registered with the RBI stood at Rs 28,544 crore as on June 2007.

Such is the interest in the securitisation market that several banks and financial institutions are looking to set up asset reconstruction companies as joint ventures.

The year 2007 saw two trends emerging in the Indian securitisation market. One, single loan sell-downs (SLDS) became prominent. The second was the growth of corporate loan securitisation due to a slowdown of sorts in retail finance.

In fact, industry experts say that corporate loans securitisation could be the next growth engine for this market and issuance of collateralised debt obligations (CDO) would get a boost in the coming years.

(A CDO is an investment-grade security that is backed by a pool of bonds, loans and other assets.)

Ms Chanda Kochhar, Joint Managing Director and CFO, ICICI Bank, said, “Till fiscal 2006, retail loans dominated the securitisation market. FY 2007 has seen a change with a tremendous increase of single corporate loan sell-downs. Corporate loans accounted for nearly one-third of the loans securitised with the number expected to increase in near future. Currently, both retail and corporate loans securitisations have an equal share.”

The most significant development was the emergence of single loan sell-down as a product class.

This market saw a 500 per cent increase in FY07 compared to FY06, Ms Kochhar said. Mr Peeyush Pallav, Director, Fitch Ratings, said that while in 2006 securitised issuances comprised primarily of ABS securities such as auto loans, commercial vehicles and personal loans, in 2007, SLDs became prominent.

“It started as an interest rate arbitrage when long-term loans disbursed were sold off through short-term pass through certificates, but evolved into more of a balance sheet management technique. Banks and NBFCs could extend loans to corporates or other NBFCs even after their lending limits were utilised. They were able to de-risk their balance sheets by selling off these loans,” he said.

The year also saw warehousing of transactions where larger pools of Rs 1,000-2,000 crore were securitised at one shot, Mr Pallav said.

Going ahead, there could potentially be more supply than demand.

Once Basel II norms kick in, banks may be forced to sell what they can rather than what they want, as they may require more capital.

“Under the Basel norms, capital costs for banks will increase as all unrated corporates will attract a risk weight of 150 per cent. So banks may require capital relief on account of risk weight and new asset categories like CDOs may become popular,” Mr Pallav said.

The lack of participation of long-term players is one of the major hindrances for the growth of the securitisation market in India, according to Ms Kochhar.

“In the US, Europe and other emerging markets, the share of MBS is about 60-65 per cent of the issuance, with ABS making up for the rest. But India’s case is unique. This is primarily due to lack of participation by long-term investors who buy the long-term MBS paper. There is lot of scope to introduce new product classes, new structures and innovate,” she said.

Another new entrant into the securitisation market apart from banks and NBFCs could be micro-finance institutions, said Mr Pallav. Cross border transactions too may happen, provided, the RBI removes restrictions, he added.

“Typically this segment grows by leaps and bounds. But unless cross border transactions are allowed the risks may remain with investors within the country,” he said.

More Stories on : Securitisation | Credit Market

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