Securitisation market at a standstill

The securitisation and the nascent asset reconstruction markets have come to a grinding halt following the Reserve Bank of India's recent guidelines on banks' investments in non-statutory liquidity ratio securities.

Buckling under pressure from banks, corporates, industry bodies and asset reconstruction companies, the central bank is expected to dilute its stand against banks' investing in unlisted paper. It may tell banks to phase out high investments in unlisted paper.

The Reserve Bank of India has capped banks' investment in unlisted non-statutory liquidity ratio securities at 10 per cent.

The cap, however, is allowed to go up to 20 per cent for investment in securities issued by special purpose vehicles, mortgage-backed securities, securitisation papers issued for core projects and bonds, and pass through certificates issued by securitisation companies and asset reconstruction companies set up under the Sarfesi Act, 2002.

However, none of the banks is in a position to invest in asset reconstruction company paper and mortgage-backed securities as their investment in unlisted bonds are way above 20 per cent. The figure could even be 60 per cent of the non-statutory liquidity ratio portfolio.

Securitisation is a process of packaging loans into tradable securities. Banks have been securitising their retail portfolios, while companies have been securitising their receivables, toll receipts and so on. The Reserve Bank of India's move will affect the ability of banks to churn their books.

Asset Reconstruction Company (India) Ltd, the country's first asset reconstruction company, is lobbying hard for a change in the norms, or else it will not take off.

The securitisation market has been growing at a rapid pace, from Rs 5,700 crore in 2002-03 to Rs 6,000 crore now.

Asset Reconstruction Company (India) Ltd plans to sell Rs 20,000 crore worth of paper in one year.

A host of companies, including Tata Motor, Mahindra Finance and Ashok Leyland, have entered the market in the last few years.

"A pass through certificate is not recognised as security under the Securities Control and Regulation Act. The market has come to a grinding halt from an overdrive mode," says Standard Chartered's head of fixed income, Tarun Saigal.

"There is uncertainty in the market and investors are worried. In the short term, volumes will be affected. Though mutual funds can buy these paper, they may not do since banks cannot invest in them. The disclosure norms need to be simplified. The retail market for securitisation is expected to grow 50 per cent in the next three years," adds Crisil's director, structured finance ratings, D Thyagarajan.

"Across the world, regulators are encouraging banks to go in for securitisation to mitigate risks. It is also used by banks to get rid of their exposures to a sector or take more exposures in a particular sector. The functioning of build-operate-transfer operators and toll collectors, too, will be in jeopardy because they securitise their future receivables," said the head of a bank on conditions of anonymity.

According to the Reserve Bank of India's guidelines, banks should ensure that fresh investments in non-statutory liquidity ratio debt securities should be in listed debt securities of companies.

Banks' investment in unlisted non-statutory liquidity ratio securities should not exceed 10 per cent of their total investment in non-statutory liquidity ratio securities on March 31 of the previous year.