SBI decides to enter securitisation business

State Bank of India (SBI), the largest commercial bank in the country, has decided to securitise assets in a big way.

The PSU giant's entry may push other banks in the state-run sector to enter the market.

Andhra Bank is the only public sector bank to have floated a mortgage-backed security in the market.

The State Bank has got board approval and is setting up a securitisation cell under the treasury wing to foray into this new activity. It is currently readying its systems and infrastructure towards it.

"The entry of SBI into the market is a big development. The bank has a major role to play both as an investor and as an originator and will induce higher trading levels and liquidity in the secondary market," said Ramraju Pai, head - structured finance ratings, Crisil.

SBI's entry is also expected to put pressure on other PSU banks to step into the market. Till now PSU banks have been shying away from the market which is dominated by private and foreign players.

SBI is entering the market with the intention of generating income from buying and selling of securitised assets.

Securitisation essentially implies creation of securities or tradeable capital market instruments. These securities are created by tying up a pool of assets "" normally receivables "" and is sold to a trust which then issues securities to investors.

The three main reasons why banks enter the securitisation market are""to reduce exposure to any particular corporate/ industrial sector, to free up capital by selling assets from the balance sheet and thereby increasing the capital adequacy ratio and finally to generate profit from buying and selling of securitised assets which contributes to the profit from the sale of investments.

The current active players in the securitisation market in India are ICICI Bank and Citibank. Other players include Kotak Mahindra Primus, LIC Housing Finance, Housing Development Finance Corporation (HDFC) and former Ashok Leyland Finance.

The market which started in the 1990s has spread mainly into two assets classes "" auto loans and housing loans.

In FY04 the total issuances in the securitisation market totalled about Rs 17,000 crore with about Rs 5,400 crore of securities backed by housing loans and Rs 11,000 crore backed by auto loans.