New RBI norms stall banks' securitisation gravy train

Most banks, active in securitisation of loan assets, have put off their plans to sell some standard assets as the Reserve Bank of India's (RBI) guidelines have nullified the incentive the banks enjoyed.

The guidelines on securitisation, issued yesterday, have undone the practice of upfront profit booking on sale of assets through securitisation and also no longer provide the incentive of release of capital for creating fresh loan assets, bankers and analysts said.

Banks hitherto provided for capital adequacy to the extent of their subscription to junior subordinated portion of securitisation issues as part of credit enhancement.

But now they are required to deduct the entire credit enhancement provided from the capital (50 per cent from Tier 1 and 50 per cent from Tier 2), which is a huge disincentive, bankers and analysts said.

Banks provide anywhere between 5 per cent and 35 per cent as credit enhancement depending on the underlying assets. Credit enhancement is the highest in home loans as the risk of -payments by borrowers and on account of interest rates is the biggest.

In 2004-05, banks securitised assets worth Rs 22,300 crore, which is 176 per cent higher than in the previous year. In the first nine months of the current year, ICICI securitised Rs 11,000 crore of loan assets.

Securitisation is a process by which banks and non-banking finance companies (NBFCs) sell loan assets to a special purpose vehicle (SPV) in return for an immediate cash payment.

In the second stage, the security interests representing claims on incoming cash flows from the pool of assets are repackaged and sold to third party investors by issuance of tradable debt securities. Credit enhancement is the support provided, including through cash collaterals, to enhance the credit rating of the pool of assets securitised.

Banks have also been prohibited from booking profit upfront on securitised assets as RBI now requires them to amortised the profit over the life of the securities issued or to be issued by the SPV.

The biggest hit will be taken by ICICI Bank, which accounts for almost half of the securitisation that happens in India. The other banks active in securitisation are Citibank, HDFC Bank and IndusInd Bank.

Rating agency Crisil head-structured finance ratings, Ramraj Pai, said securitisation deals are not likely to involve significant figures at least in the current quarter. The current securitisation market is very shallow with top three originators accounting for more than three-fourths of all issuances in volume terms.

HDFC Bank and Citigroup have significantly scaled down their issuances in the first half of the present year. "This can be explained by the fact that the implications of the guidelines are more onerous for the longer term MBS transactions, and it has taken time for the market structures to evolve," Pai said.

An official from another rating agency Icra said liquidity cannot act as incentive for banks as the cost of amounts generated through securitisation is higher than the normal sources of funds.