The central bank wants to control markets that grow on arbitrage.
Making known its reservations about growth in securitisation based on arbitrage, the Reserve Bank of India (RBI) today said the thrust of final guidelines will be on a healthy growth of this segment, which provides liquidity to financial sector entities. Securitisation of assets, or bundling together loans into one security that can then be traded, was allowed in India a decade ago and banks quickly turned to it as a means to hedge their interest rate risk.
In the Indian context, ‘sustainable securitisation’ can play a positive role in financial intermediation, provided there is genuine transfer of risk away from the banking system, RBI Deputy Governor Shyamala Gopinath said while addressing a summit on securitisation.
“We cannot have markets growing on the basis of some arbitrage. The existing and proposed guidelines are in line with international practices. They may appear stringent but, in the long term, it is imperative that securitisation market develops for the right reasons.”
RBI had released planned rules for securitisation in April, suggesting – among other things – banks must hold on to a loan for at least nine months before converting it into a securitised asset. But banks want the minimum holding period and retention requirement to be reduced.
Standardisation was necessary to facilitate risk assessment and valuation and eventually enable the trading of these securities on the exchanges, Gopinath said.
“Under Basel-I regime, there was no capital requirement for assets transferred from your books. Although true sale requirements were not met, the entities availed of the full capital benefits. As a consequence, the actual capital ratios of the banks turned out to be much lower than what they appeared to be based on the risks. But in India, there are simple structures. It is not a big concern in India. So, we want to see how to put securitisation on a more sustainable basis," she said.
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On some issues that would need more works, she said bilateral assignments of a single loan or a portfolio that are in substance securitisation follow the guidelines. The securitised paper issued by special purpose vehicles (SPVs) has been recognised as ‘security’ under Securities Contract Regulation Act (SCRA). However, there are still some tax issues relating to recognition of pass-through structure of the SPV.
An active participation by such long-term institutional investors as insurance companies, pension and provident funds in securitisation is necessary. This would help to substitute long-term banking funding, Gopinath added.
These investors should have better access to essential information. Their dependence on rating agencies should be less. This will require dissemination of loan pool composition and ongoing performance detail.
There are serious data issues for regulators of banks and non-banking finance companies. Hence, RBI and market regulator Sebi will have to put in place a robust reporting mechanism for primary issuances and secondary market data, she added.