RBI may tighten capital need for securitisation

The Reserve Bank of India (RBI) is expected to stipulate that a portion of the collateral provided by a bank for its securitisation transactions be deducted from banks' tier-I capital, according to rating agency Crisil.

Following the publication of its draft guidelines on securitisation, the RBI is now expected to finalise the guidelines for capital treatment of collateral, which is used as credit enhancement in securitisation transactions, the rating agency said.

Based on the draft guidelines, Crisil believes that the impact on the capital adequacy levels of most banks will not be material. It is possible, though, that a few banks may be negatively affected.

For a specific bank, the impact on the regulatory capital adequacy ratio (CAR) will depend on the extent of securitisation carried out by the bank, the amount of credit enhancements provided by it, the residual tenure of its outstanding securitisation transactions, and the current tier-I capital levels.

ICICI Bank and Citibank are the leading originators of securitisation issues, which free up capital for creation of new loan assets.

The exact impact of the deduction of collateral from tier-I capital is not quantifiable at the moment, since the current draft guidelines are unclear on whether the guidelines would be applicable on a retrospective basis.

However, on a systemic basis, this impact will only be marginal on account of the relatively low prevalence of securitisation in the Indian banking system.

Crisil has been rating securitisation transactions since 1992. Its analysis reveals that the ultimate utilisation of credit-cum-liquidity enhancements is very low in the Indian context.

This is because a large component of the credit-cum-liquidity enhancements stipulated for the past transactions has actually been put in place to take care of liquidity requirements and, hence, does not suffer any losses.

Also, in past transactions, there was no bifurcation of the credit enhancement into the first loss and the second loss pieces. As a result, a large portion of the credit-cum-liquidity enhancements stipulated for transactions originated in the past are expected to be released on the redemption of the transactions, and the amount deducted from capital can then be added back.

While there could be an immediate impact on CAR of a few banks if the guidelines are applicable on a retrospective basis, Crisil would factor in its analysis the prospective release of capital on the redemption of these transactions. Crisil said it will undertake an impact analysis of CAR of all its rated banks once the final guidelines are announced.