Securitisation market has opened up, says report

The securitisation market's dependence on mutual funds is waning with the emergence of public sector banks (PSBs) as investors.

"The investing side of the securitisation market has opened up," said a research report published by rating agency Crisil.

The report said several PSBs have either forayed into this line of investment or significantly increased their exposure to securitisation issuances in the first half of 2005-06.

The report sees this trend reducing the market's dependence on mutual funds that earlier accounted for a disproportionate share of the subscription to securitisation issuances.

Crisil is in advanced discussions with five new originators expected to undertake issuances in the coming months. The considerable rise in the market interest in securitisation can be attributed to the draft guidelines issued by the Reserve Bank of India (RBI), which have accorded regulatory recognition to securitisation making it easier for many regulated entities to deal in the product. The presence of big-ticket investors is also expected to aid standardisation, Crisil felt.

It said 17 per cent of Crisil-rated transactions in the first half of 2005-06 were on a direct assignment basis, against 3 per cent in the corresponding period last year.

Discussions with market players reveal that this has been driven by their desire to grow the loan book, avoid mark-to-market losses (in case of rising interest rates) and possibly obtain other regulatory benefits like priority sector lending wherever applicable.

The number of originators has remained constant vis-a-vis last year, with the same set of banks and non-banking financial companies (NBFCs) present in the market. ICICI Bank continues to be the largest originator, contributing over 50 per cent of new issuances.

The market remains shallow with the top three originators accounting for over 75 per cent of all issuances in terms of volumes.

In the first half of 2004-05, ICICI Bank, Citigroup and IndusInd Bank (Ashok Leyland Finance) led the market, while in the corresponding period of 2005-06, ICICI Bank was the leader followed by IndusInd Bank and the Tata group.

HDFC Bank and Citigroup have significantly scaled down their issuances in the first half of the present year. In April 2005, the RBI had issued a set of draft guidelines governing securitisation of standard assets.

These guidelines, applicable to banks, financial institutions and NBFCs, are aimed at ensuring healthy development of the securitisation market.

Figures show that the market has slowed down marginally with overall securitisation volumes for the first half of 2005-06 lower vis-a-vis volumes for the same period last year. Applying caution, some originators have been staying away from the market or have scaled down their market issuances pending finalisation of the draft RBI guidelines.

In Crisil's opinion, the stable trends in the securitisation markets could receive a further push through the resolution of certain issues, including release of the final set of guidelines and clarification of pending issues.

The rating agency believes that implementation of guidelines could be prospective in nature, thus allowing the market to migrate to the new regime in a phased manner.

Another requirement is that the regulator needs to bring about differential capital treatment between the first and the second loss credit enhancements. Given the differential levels of protection to the first and the second loss, the second loss could be provided a definitive capital benefit vis-à-vis the first loss.

Also, evolution of separate guidelines on direct assignment transactions will be a welcome step, Crisil said. Despite constituting a large component of the market, bilateral direct assignment transactions are at present not under the purview of the guidelines.

Most large banks and financial institutions have been actively using this route (both rated and unrated). Therefore, separate guidelines for such transactions (akin to that released for securitisation) would create a transparent public market for such transactions with the necessary checks and balances.