New securitisation norm to hit IndusInd Bank

Impact on ICICI Bank will be minimal because of huge capital base.

IndusInd Bank's capital adequacy ratio (CAR) could fall below the minimum required 9 per cent if it has to apply the recently-announced guidelines on securitisation of standard assets.

ICICI Bank, HDFC Bank and Citibank are the other major originators of securitised assets. For ICICI Bank, the most aggressive player having originated nearly 50 per cent of the securitised assets, the impact will be minimal because of its large capital base.

IndusInd Bank plans to seek forbearance from the Reserve Bank of India (RBI) for its securitisation transactions done prior to April 2005, when the draft guidelines on securitisation were issued.

IndusInd's capital adequacy at the end of December 2005 was 11.79 per cent. It would need to deduct over Rs 325 crore from its Tier I and Tier II capital aggregating over Rs 1,369 crore, analysts said.

The guidelines require banks, financial institutions and NBFCs to deduct 50 per cent each of first loss credit enhancement and second loss credit enhancement from Tier I capital and another 50 per cent each from Tier II capital.

The guidelines are applicable with immediate effect for assets securitised in 2005-06. RBI would take a decision on a case-by-case basis for assets securitised in prior periods.

ICICI Bank securitised Rs 11,000 crore of assets in 2005-06 thus far, which would result in the bank having to deduct over Rs 800 crore from its capital "" over Rs 400 crore each from Tier I and Tier II capital.

Analysts said ICICI Bank will not be affected much as the impact of capital deduction for assets securitised in 2005-06 would be negligible on its capital adequacy.

The total outstanding securitised assets originated by ICICI Bank amount to about Rs 20,000 crore and the credit enhancement provided for it will be nearly Rs 2,000 crore. ICICI Bank's CAR at the end of December 2005 was 14.53 per cent.

Rating agency Crisil has put ratings assigned to IndusInd Bank on a "rating watch" following the securitisation guidelines.

Krishnan Sitaraman, Crisil's head-financial sector ratings, said, "We are not sure as to how the capital adequacy ratio of IndusInd Bank would be placed, looking at the capital treatment of the securitised transactions. We will maintain a close watch on the actions taken by the bank in this regard."

He said in case the RBI agrees to grant the bank permission for partial adherence or if there is some fresh capital infusion, Crisil might review its outlook.

The other possibility is that there is an entire second loss cover for the bank's securitisation transactions being taken up by a third party.

The total securitisation volumes for 2004-05 stood at Rs 30,000 crore, while for the period between April 2005-December 2005, the amount of securitised assets were Rs 15,000 crore.