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In the global context, India’s securitisation market has hardly taken off, despite many years of chest thumping by banks and rating agencies because regulators have been wary of opening up the market – especially after the 2008 sub-prime crisis.
Many market players have said the government should work to deepen the securitisation market because it will provide stable long-term capital to companies and institutions looking to develop the country’s infrastructure sector. The regulators have instead worked to deepen the rupee bond market and have introduced more restrictions on securitisation.
However, amid the turmoil related to the US and European sovereign debt crises and a diminishing of investment options, Indian bankers are now urging investors to look at the country’s securitisation products more closely.
“Despite product limitations, Indian securitisation transactions have thrived and transaction performances for allowed categories have been generally stable through credit cycles, with few transactions defaulting or threatening to default,” said Peeyush Pallav, vice president structured debt solutions, treasury and markets at DBS Bank.
Although delinquency rates differ according to the asset class being securitised, they were only about 1%–6% of the overall market for asset-backed securities with cars or commercial vehicles as the underlying, and about 1%-3% for mortgage-backed securities, said bankers.
Pallav noted that, structurally, Indian securitisation deals were safe investments. Most cash-flow securitisations have as their underlying fixed-rate consumer loans or floating-rate mortgages with equated monthly instalments from underlying borrowers. “Since revolving structures are prohibited in India under the extant regulations, almost all transactions there have been amortising in nature. Even though this increases reinvestment risks on account of prepayments, it reduces the refinancing risks,” he said.
Most transactions in India are also originated for assets backed with cash flows with no synthetic securitisations or re-securitisations permitted.
Security cheques or post-dated cheques usually protect loans in India, adding further security under the Negotiable Instruments Act. In addition, the loans are not obligations limited to the extent of the security available, and borrowers are required to pay the shortfalls even after the repossessions and subsequent recoveries have been enforced.
“Securitisation transactions help issuers to access capital in a form different from plain debt, equity or hybrid and, thus, allow them to have a well-diversified capital structure,” said Pallav.
“From an investing bank’s viewpoint, the strong legal and financial structuring behind these deals, the possibility of replacing the servicer in a stress scenario, as well as the counterparty exposure on a diversified basis, improve the credit quality of the exposures the institution may otherwise carry on its books,” Pallav added.
They also offer greater transparency to portfolio investors. The monthly reporting of portfolio collections, delinquency build-ups, defaults and recoveries highlighted transaction performances across asset categories, geographies, borrower types, and issuer types, in advance of their impacting issuers’ financial statements.
There is indeed room for securitisation to grow and for the right reasons on account of providing investor diversification, capital structure diversification and its asset liability matching nature. Difficulties, however, remain.
Issuers, for instance, now find costly the inability to reduce credit enhancement in line with transaction amortisation. They also find uncertainties – with respect to tax transparency, security creation, and raising of foreign currency debt – detrimental to the development of a future flow market.
Asset categories, such as short-term receivables, are unlikely to be funded through securitisation because of lack of revolving structures. There are no regulations facilitating covered bond issuances. Issuers and investors also await further clarity on the minimum holding periods and minimum retention requirements, as well as guidelines with respect to KYC requirements for microfinance securitisations.
While such retention requirements on holding periods are clearly credit positive because they enforce an increased focus on underwriting, and risk participation through skin in the game, they may also significantly reduce the tenor of funds to be raised through securitisations, to an extent where the added expenses – trustee fees, rating fees, auditor fees, operational expenses and management time – start becoming major deterrents.
There is also a need to widen the investor base to include both domestic investors from banks and funds to insurance companies, as well as to foreign investors. Foreign institutional investors find the lock-in periods difficult, while withholding taxes reduce the attractiveness of long-term investments, such as those required for infrastructure funding.
By Shankar Ramakrishnan, Deputy Editor, IFR Asia