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After having seen the recent fall of giant financial institutions, a common worry closer home is whether the sub-prime crisis can occur in India too.

“We do not have such lending but given the large increase in the share of mortgages in the bank portfolio, there is a similarity,” writes Madan Sabnavis in Macroeconomics Demystified ( www.tatamcgrawhill.com ).

Also, the fact that this portfolio has been built at a time when interest rates were low and are being re-priced today with higher interest rate regimes does highlight a payment problem for borrowers, he adds.

“Protracted repayment schedules and higher interest costs could affect the ability of borrowers to repay, which was the same with the sub-prime episode.” However, a difference that Sabnavis sees is in property prices still ruling high — which will prevent the value of the collateral from declining as it happened in the US.

He traces how all historic bubbles are accompanied by a sharp rise in leverage, and innovative financial products. They were junk bonds at one time while they were collateralised debt obligations (CDOs) not long ago.

“Securitisation had actually atomised the lending industry and allowed the sub-prime market to be regulated largely by rating agencies and securitisers.” Thinly capitalised non-bank lenders could access capital markets and expand rapidly…

Essential primer for finance professionals who would like to add an economics edge to their skill sets.

The word securitisation, despite its connotation of safety, is proving to be a bugbear in the financial world that has been witnessing mega failures resulting from a securitisation binge gone awry.

To India, however, the concept of securitisation is new, writes T. K. A. Padmanabhan in Securitization & Reconstruction of Financial Assets: Concept, Law and Practice ( www.cliof india.com ).

He defines ‘securitisation’ as a process under which securities are created whose payments are supported by cash flows generated by a pool of financial assets. “In any standard securitisation transaction a pool of financial assets are transferred by the owner (called originator) to a special purpose entity (SPE) which in turn issues securities (pass through certificates or PTCs) to qualified investors.”

Can successive securitisation be done, the way debts got repackaged and re-repackaged in the US? The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, is clear on this, the book explains.

“An originator can securitise his financial assets by transferring the same to a securitisation company. The securitisation company cannot again securitise these assets with another securitisation company,” the author observes.

“Being an SPV (special purpose vehicle), a securitisation company is authorised only to hold in trust the securitised assets for the benefit of the investors of PTCs and the securitised assets can be used to repay these investors.”

Useful reference.

D. MURALI

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