New RBI norms, hardening rates, liquidity concerns curb appetite.
Hit by a slump in single corporate loan sell downs, securitisation volumes shrank in April-December 2010 to Rs 18,800 crore from Rs 28,200 crore in the year-ago period, according to ratings agency Icra.
Securitisation is the process of converting existing assets or future cash flows into marketable securities. Typically, loans in segments such as vehicle, home and corporate are pooled and packaged into securities. The repayments from borrowers are assigned to investors in securities.
| DECLINING TREND SECURITISATION BUSINESS DURING APRIL-DECEMBER | ||||
| Category | 2009 | 2010 | ||
| Amount | Deals | Amount | Deals | |
| Asset-backed | 10,800 | 51 | 10,600 | 60 |
| Mortgage-backed | 3,800 | 8 | 3,900 | 11 |
| Single loan | 13,600 | 57 | 4,300 | 30 |
| Total | 28,200 | 116 | 18,800 | 101 |
| Note: Amount in Rs crore and deals in numbers Source - ICRA data | ||||
The Reserve Bank of India (RBI) has proposed stringent norms for securitisation, hardening interest rates.
According to Icra, business in the asset-backed securities (car, consumer loans) market was flat. Banks and financial institutions parcelled loans worth Rs 10,600 crore, as against Rs 10,800 crore in April-December 2009.
The activity in the home and property loan securitisation segment was also flat, at Rs 3,900 crore, the same as the comparable period.
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Transactions in loan sell-downs (LSOs), mostly corporate loans, dived to 30, involving a loan pool worth Rs 4,300 crore, in the nine months ended December 2010 from Rs 57 deals for Rs 13,600 crore a year before. An LSO is a relatively simple transaction where banks (mostly foreign or private) or non-banking finance companies securitise the receivables from a single corporate loan.
Kalpesh Gada, head of structured finance products with Icra, said the RBI’s proposed stringent norms for retaining loans on books kept lenders away. It has proposed tough norms regarding the minimum lock-in period and the minimum retention requirement, affecting LSO transactions, which were mostly short-term in nature.
The hardening of interest rates accompanied by volatility in the third quarter (October-December 2010) also impacted business. In a rising interest rate regime, it is tough to find a company to take a one-year loan and parcel it in securitised form to investors, Gada said.
The concerns relating to credit quality and secondary market illiquidity had contributed towards curbing investors’ appetite for LSOs in 2009-10.
The market for securitisation had fallen in 2008-09 and 2009-10 due to economic slowdown. Overall volumes declined 22 per cent to Rs 42,600 crore in 2009-10 over the previous year, according to Icra.
Asset-backed securities (ABS) transactions, overtaken by LSO as the largest product class in 2008-09, re-emerged as the dominant product class in 2009-10. The share of ABS improved to 49 per cent in the reporting year from 25 per cent in 2008-09. The share of residential mortgages also improved to 15 per cent of total issuances in FY10.
There is potential for ABS and mortgage-backed securities’ volumes to grow. As originators scale up their lending volumes, securitisation will continue to be an important funding tool for them. Investors’ confidence to take exposure to securitised papers would come handy.