Taking cover

The securitisation market — capable of distributing risks among counterparties better equipped to manage them — is a key element of the financial ecosystem. But it has remained underdeveloped in India for various reasons. Budget 2016-17 attempted to give a fresh life to it by doing away with the dividend distribution tax and permitting foreign portfolio investors to invest in securitisation transactions. Are these measures enough to drive securitisation volumes?

While on the surface these two measures look constructive, they are perhaps not the real game changer. With lots of structural factors behind the sub-optimal growth of the securitisation market, development of this market requires dedicated, determined efforts from regulators.

Certain factors have held down the securitisation market. First, securitisation has not been widely used as an asset liability management tool in India unlike in advanced economies. Banks are using it only to meet their primary sector lending (PSL) targets. Crucially, the RBI’s decision to bring various segments under the PSL category and the introduction of PSLC (primary sector lending certificate) are likely to reduce securitisation volumes further.

Second, the wrong claim that securitised instruments had caused the global financial crisis has undermined its image. In fact, exotic financial instruments, not the plain vanilla securitised instruments, had triggered the global meltdown.

Third, India does have an active secondary market for securitisation instruments. The market lacks large-scale retail sector participation as well.

Fourth, long-tenor pass-through certificates — given to an investor against mortgage-backed securities that lie with the issuer — lack strong demand due to restrictions on the country’s two major, long-term investors: pension funds and insurance companies.

A well-functioning securitisation market can act as a potent tool for infrastructure financing while reducing the banking system’s vulnerability to the risks of projects being stalled — project developers can liquidate their infrastructure assets by selling them to another entity as marketable securities and the proceeds can be used to repay bank loans.

India should aim to create a thriving securitisation market not only for AAA-rated paper but also for lower tranches, while ensuring that banks are not indulging in creating complex instruments.

A better price discovery mechanism facilitating seamless information flows is essential for securitised instruments to gain traction. This calls for the creation of an electronic platform, as in equities. Capital market regulator SEBI seems to be working on such a platform; better coordination among various regulators could lead to the creation of a trading platform that can meet the expectations of investors.

Also important is getting banks to act as originators and expanding the investor base. Restrictions on insurance and pension companies’ investment in securitised products should be relaxed as they are well equipped to conduct more rigorous credit analyses.

Of course, it is important to be watchful of risks associated with this market, hence a comprehensive repository for systematic risk monitoring must be in place.

The writer is a Bengaluru-based economist

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