Update on Indian Securitisation Market

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Date Published 2012
Primary Author Kalpesh Gada and Remika Agarwal
Other Authors
Theme The Secondary Market


Issuance volume in the Indian securitisation market was Rs. 36,603 crore1 in FY20122, a growth of 15% over the previous fiscal. The increase in volume—following a continuous decline for three years—was on account of a 26% rise in securitisation3 of retail loans (both Asset-Backed Securitisation or ABS, and Residential Mortgage-Backed Securitisation or RMBS, cumulatively).This led to a rise in transactions involving bilateral assignment of retail loan pools—mainly including loans to Small and Medium Enterprises (SMEs) or Small Road Transport Operators (SRTOs) and micro credit—especially during the last quarter of the year. Bilateral assignments—accounting for around 75% of ABS and RMBS volume in India—continued to be the preferred route relative to conventional securitisation, given that these transactions were not covered by RBI’s guidelines of Feb 2006 on securitisation, thus making them less restrictive for Originators5. However, going forward, ICRA expects a significant decline in volume of bilateral assignment transactions given that the RBI Guidelines on Securitisation issued in May 2012 prohibit stipulation of credit enhancement for assignment transactions, thus exposing the purchasing banks to the entire credit risk on the assigned portfolio. Nevertheless, fundamentally, the banks’ need to meet PSL targets would continue, which could going forward be met—at least partly—through the securitisation route, wherein credit enhancement is permitted. However, the deterrents to a widespread shift to securitisation are two-fold—high capital charge for Originators6 and impact of mark-to-market for the Investing Banks. Another key constraint presently is the ambiguity on the taxation of PTCs, a matter which is presently sub-judice. Pending clarity on the issue, Mutual Funds—as well as several banks—are staying away from making fresh investments in PTC instruments. Additionally, RBI’s adoption of the proposals of the Nair committee on Priority Sector Lending (report submitted in February 2012) would be a key regulatory guideline to watch out for.

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