INTRODUCTION & RELATED CONCEPTSPROCESS OF SECURITIZATIONINDIAN REGULATORY FRAMEWORK FORSECURITIZATIONSECURITIZATION: THE INDIAN SCENARIO5/5/20132
Securitization refers to the process of pooling and selling existingassets in the books of a lender/creditor(The ‗Originator‘) to aSpecial Purpose Vehicle(SPV) and repackaging them into tradable,asset-backed securities(ABS).The essential features ofsecuritization are :-1) the sale proceeds are available to the Originator of thetransaction(i.e. the seller) immediately;2) the assets are taken off the Originator‘s books and are notavailable to the Originator‘s creditors in the event of hisbankruptcy;3) can have higher credit ratings than the Originator‘s , dependingon the quality of assets securitized and credit enhancementsmade available5/5/20133
The different entities-:Originator• The original lender is called the originator.• It is the entity on whose books the assets to be securitized exist.• Typically, the Originator is a bank, a Non-banking finance company(NBFC), a housing finance companyor, occasionally even a manufacturing/service company.Special Purpose Vehicle• SPVs are companies with small capital, or sometimes trusts, formed for the specific purpose of issuingsecurities in securitization transactions whose ownership and management are independent of theOriginator.• In order to ensure that the assets actually achieve the bankruptcy remoteness, it is essential to movethem out of the balance sheet of the Originator and park them with another independent entity.•The SPV is critical in a securitization transaction because it is this entity that delinks thecredit of the entity seeking funding from the creditworthiness of the securities that arecreated in a securitization. Obligor• The Obligor(s): The Obligor is the Originators debtor (borrower of the originalloan).The amount outstanding from the Obligor is the asset that is transferred tothe SPV. The credit standing of the Obligor(s) is of paramount importance in asecuritization transaction 5/5/20134
Servicer• The servicer collects the moneys due from individual borrowers in the pool, makes payoutsto the investors and follows up on delinquent accounts.• The servicer also furnishes periodic information to the rating agency and the trustee on poolperformance. Trustee• The trustees have a fiduciary role role to oversee the performance of the transaction untilmaturity with a view to protect the interest of the investors.• The trustee is vested with necessary powers including the, in particular, the power tochanger the Servicer, if necessary• Trustees tend to be reputed banks, financial institutions or firms of Chartered Accountants orSolicitors. Rating Agency• Credit rating agencies rate the securities which are issued to provide an externalperspective on the liabilities being created and help the investor make a more informeddecision.• The rating process would assess the strength of the cash flow and the mechanism designedto ensure full and timely payment by the process of selection of loans of appropriate creditquality, the extent of credit and liquidity support provided and the strength of the legalframework.5/5/20135
Structurer• Normally, an investment banker is responsible as structurer for bringingtogether the Originator, credit enhancer/s, the investors and otherpartners to a securitization deal. It also works with the Originator andhelps in structuring deals.5/5/20136
Credit Enhancement-• It refers to the various means that attempt to buffer investorsagainst losses on the asset collateralizing their investment.• Securities generated in a securitization deal are "creditenhanced”, meaning their credit quality is increased above that ofthe originators unsecured debt or underlying asset pool.• This increases the likelihood that the investors will receive cashflows to which they are entitled, and thus causes the securities tohave a higher credit rating than the originator.Credit Enhancements are either external(third party) orinternal(structural or cash-flow driven).5/5/20137
* External Credit Enhancements:-i. Insurance- Full insurance is provided against losses on the assets. This tantamounts to a 100 percent guarantee of a transaction‘s principal and interest payments. The issuer of theinsurance looks to an initial premium or other support to cover credit losses.ii. Third-Party guarantee This method involves a limited/full guarantee by a third party to cover losses thatmay arise on the non-performance of the collateral.iii. Letter of credit For structures with credit ratings below the level sought for the issue, a third partyprovides a letter of credit for a nominal amount. This may provide either full orpartial cover of the issuer‘s obligation.5/5/20138
*i. Credit TranchingThe SPV issues two(or more) tranches of securities and establishes apredetermined priority in their servicing, whereby first losses areborne by the holders of the subordinate tranches(at times originatoritself).Apart from providing comfort to holders of senior debt, credittranching also permits targeting investors with specific risk-returnpreferences.ii. Over Collateralisation The originator sets aside assets in excess of the collateral required tobe assigned to the SPV. The cash flows from these assets must firstmeet any overdue payments of the main pool, before they can berouted back to the originator.iii. Cash Collateral This works in the same way as over-collateralisation.However, sincethe quality of cash is higher than assets yet to be converted intocash, the quantum of cash required to meet the desired rating wouldbe lower than asset over-collateral to that extent.5/5/20139
iv. Spread Account For each period, the difference between the cash flow generated by the poolof loans and receivables and the interest paid to the holders of the asset-backed securities and the fees paid (primarily for servicing) is in effect themonthly profit. In securitization terminology, it is referred to as the excessspread. Only realizations in excess of this specified amount are routed back to theOriginator. This amount is returned to the Originator after the payment ofprincipal and interest to the investors. True Sale-• The genesis of securitization lies in giving the investors rights over specificassets of the originator, such that the investors are not affected by theperformance, or bankruptcy of the originator. This would obviously necessitatethat the investors, or the SPV which is a conduit on behalf of the investors, haslegally acquired the assets.• True sale involves legal separation of the Originator from the assets, with thepurpose of putting them beyond the reach of the Originator or itscreditors, even in the event of bankruptcy of the Originator. This is known as‘bankruptcy remoteness’ of the transaction5/5/201310
Why is True Sale required?• Bankruptcy Remoteness ensures that the cash flows from the securitized assets are availablesolely for the benefit of the SPV and its creditors, namely the holders of the PTCs, or ,in otherwords , to allow investors an unqualified right over the assets being securitized. What if a transfer is not a true sale?If the transfer of assets for the benefits of investors is not a true sale, itmight mean:*the investors are unsecured lenders*the transfer is regarded as creating security interest in favour of investors; sothe investors are secured lenders (whether such security interest is perfectedor not will depend on the procedure relating to perfection of securityinterests)*worst of all, since the transaction would not have been backed by loandocumentation, the investors may not be regarded as lenders as well -meaning, they might only have an equitable right to recover their money butwould not stand as unsecured lenders. 5/5/201311
Pass through Certificates(PTCs) & Pay Through Securities(PTS) Pass through Certificates-• Cash flows are ‗passed through‘ to the holders of the securities in the form ofmonthly payment of interest, principal and pre-payments.• They reflect ownership rights in the assets backing the securities.• Pre-payment precisely reflects the payment on the underlying mortgage. If itis a home loan with monthly payments, the payments on securities would alsobe monthly but at a slightly less coupon rate than the loan. Pay through Securities• This permits the issuer to restructure receivables flow to offer investmentmaturities to the investors associated with varied yields and risks. The issuerowns the receivables and sells the the debt backed by the assets.• The cash flows can be remade into various debt tranches with differentmaturities.5/5/201312
ILLUSTRATION OF A SECURITIZATION* We use a hypothetical securitization to illustrate the key elements of a securitization and the parties to a transaction. Our hypothetical firm is theAce Corporation, a manufacturer of specialized equipment for the construction of commercial buildings. Some of its sales are for cash, but the bulkare from installment sales contracts. For simplicity, we assume that the installment period is typically seven years. The collat- eral for eachinstallment sales contract (sometimes loosely referred to herein as a loan) is the construction equipment purchased by the bor- rower. The loanspecifies the interest rate the customer pays.* The decision to extend a loan to a customer is made by the credit department of Ace Corporation based on criteria established by the firm, referredto as its underwriting standards. In this securitization, Ace Corporation is referred to as the originator because it has origi- nated the loans to itscustomers. Moreover, Ace Corporation may have a department that is responsible for collecting payments from customers, notifying customers whomay be delinquent, and, when necessary, recovering and disposing of the collateral (i.e., the con- struction equipment in our illustration) if thecustomer fails to make loan repayments by a specified time. These activities are referred to as servicing the loan. While the servicer of the loansneed not be the originator of the loans, in our illustration we are assuming that Ace Corporation is the servicer.* Suppose that Ace Corporation currently has $400 million in installment sales contracts (i.e., its accounts receivable). The chief financial officer (CFO)of Ace Corporation wants to use its install- ment sales contracts to raise $320 million rather than issue a tradi- tional corporate bond. To do so, theCFO will work with its legal staff to set up a legal entity referred to as a special purpose vehicle (SPV), also referred to as a special purpose entity(SPE). The SPV is critical* Introduction 9* in a securitization transaction because it is this entity that delinks the credit of the entity seeking funding (Ace Corporation) from thecreditworthiness of the securities that are created in a securitization. Assume that the SPV set up by Ace Corporate is called Financial Ace Trust(FACET). Ace Corporation sells $320 million of the loans to FACET and receives from FACET $320 million in cash, the amount the CFO wanted to raise.Since Ace Corporation is the originator of the loans and has sold these loans to FACET, Ace Corporation is referred to as the originator/seller in thistransaction.* It is critical that the sale of the loans transferred be a true sale by Ace Corporation to FACET. By a true sale it is meant that the sale of the assetsclosely substantively resembles a commercial sale of such assets by Ace Corporation. If it is subsequently determined in a bank- ruptcy proceedingthat the so-called sale by Ace Corporation was merely a nomenclature or a camouflage, then a bankruptcy judge can rule that the assets were neversold and were merely pledged as col- lateral for a financing. In that case, in the event of a bankruptcy filing by Ace Corporation, the bankruptcyjudge can have the assets of FACET treated as part of the assets of Ace Corporation. This would defeat the purpose of setting up the SPV. Typically, atrue sale opinion letter by a law firm is sought to provide additional comfort to the parties in the transaction.* Where does FACET obtain the $320 million to buy the assets? It does so by issuing asset-backed securities, called bond classes or tranches. A simpletransaction can involve the sale of just one bond class with a par value of $320 million. The payments to the bond classes are obtained from thepayments made by the obligors (i.e., the buyers of the construction equipment). The payments from the obli- gors include principal repayment andinterest. However, most secu- ritization transactions involve a more complex structure than simply one bond class. For example, there can be rulesfor distribution of principal and interest other than on a pro rata basis to different bond classes. The creation of different bond classes allows thedistribution of the collateral‘s risk among different types of investors: investors with different appetite‘s for interest rate risk (i.e., price sensitivityto changes in interest rates) and credit risk.* An example of a more complicated transaction is one in which two bond classes are created, bond class A1 and bond class A2. The* 10 BACKGROUND* par value for bond class A1 is $120 million and for bond class A2 is $200 million. The priority rule set forth in the structure can simply specify thatbond class A1 receives all the principal generated from the collateral until all the entire $120 million of bond class A1 is paid off and then bond classA2 begins to receive principal. Bond class A1 is then a shorter-term bond than bond class A2. This type of tranching is used to create securities withdifferent exposures to interest rate risk.* Also, as will be explained in later chapters, in most securitizations there is more than one bond class and the various bond classes differ as to howthey share any losses resulting from the obligor defaults. For example, suppose FACET issued $290 million par value of bond class A, the senior bondclass, and $30 million par value of bond class B, a subordinated bond class. As long as there are no defaults by obligors that exceed $30 million, thenbond class A receives full repayment of its $290 million. 5/5/201313
*5/5/201315First securitization deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160mnRs 160 mn&T raised Rs 4,090 mn through the securitization of future lease rentals to raise capital for itspower plant in 1999.capital for its power plant in 1999.India‘s first securitization of personal loan by Citibank in 1999 for Rs 2,841 mnIndia‘s first mortgage backed securities issue (MBS) of Rs 597 mn by NHB and HDFC in 2001.securitization of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through off shoreSPV.India‘s first sales tax deferrals securitization by Govt of Maharashtra in 2001 for Rs1,500mn.1,500 mn.India‘s first deal in the power sector by Karnataka Electricity Board for receivables-India‘s firstdeal in the power sector by Karnataka Electricity Board for receivables worth Rs 1,940 mn andplaced them with HUDCO. worth Rs 1,940 mn and placed them with HUDCO.India‘s first Collateralised Debt Obligation (CDO) deal by ICICI bank in 2002.India‘s first floating rate securitization issuance by Citigroup of Rs 2,810 mn in 2003 The fixedrate auto loan receivables of Citibank and Citicorp Finance India included in the securitizationIndia‘s first securitization of sovereign lease receivables by Indian Railway Finance Corporation(IRFC) of Rs 1,960 mn in 2005.The receivables consist of lease amounts payable by the ministryof railways to IRFC.India‘s largest securitization deal by ICICI bank of Rs 19,299 mn in 2007.Theunderlying assetpool was auto loan receivables. http://www.financialexpress.com/news/Indian-securitization/191022/0http://www.financialexpress.com/news/Indian-securitization/191022/0
*Types of Securitization:Asset Backed securities (ABS) :• ABS refers to the securitization of non-mortgage retail loans. Till the late 1990s, assets classessecuritized under ABS in India included only car loans and commercial vehicle loans.Thereafter, construction equipment loans, two wheeler loans, utility vehicle loans, and personal loanpools, have also been securitized.Mortgage Backed Securities (MBS)• (MBS) are asset-backed securities whose cash flows are backed by the principal and interest payments of a set ofmortgage loans.• Since the underlying home loans in MBS pool have a floating-rate, the scheduled cash flow on such pools isuncertain and liable to change, depending on actual interest rate. Moreover, options to convert from fixed tofloating rate and vice-versa, coupled with negotiated re-pricing of loans, added to the uncertainty of the cashflow in the MBS pool.• With the underlying loans earning floating rates, Pass Through Certificates (PTCs) in MBS issues are also beingpredominantly priced on a floating rate basis. In 2005, 52% of issuance was based on a floating rate.Collateralized Debt Obligation (CDO) :• In CDO transactions, the debt securities issued by the SPV are backed by a diversified loan or bondportfolio. There is thus a basic difference between CDOs and ABS, the latter being homogeneous pools ofassets such as mortgages or credit card receivables, in contrast to the diversified portfolios backingCDOs.Collateralized Loan Obligations :Where the originating bank transfers a pool of loans, the bonds that emerge are called collateralizedloan obligations or CLOs.Collateralized Bond Obligations :Where the bank transfers a portfolio of bonds and securitizes the same, the resulting securitized bondscould be called collateralized bond obligations or CBOs.5/5/201316
18•By the late 1990s, a rising level of bank N.P.As motivated committees like theNarasimham Committee II and Andhyarujina Committee, which were constitutedfor examining banking sector reforms, to seek changes in the legal system toaddress the issue of N.P.As.•The SARFAESI Act empowers Banks / Financial Institutions to recover their Non-Performing Assets without the intervention of the Court. It was passed in 2002 tolegalize securitisation and reconstruction of financial assets and enforce securityinterest. The Act envisaged the formation of Asset Reconstruction Companies(A.R.Cs) and securitisation Companies (S.Cs).•The main provisions of this Act include-registration and regulation of securitisation companies or reconstructioncompanies by the R.B.I, facilitate securitisation of financial assets of banks,empower S.Cs/A.R.Cs to raise funds by issuing security receipts to qualifiedinstitutional buyers (QIBs),empowering banks and FIs to take possession of securities given for financialassistance and sell or lease the same to take over management in the event ofdefault.
19THE SARFAESI ACT, 2002The Act provides three alternative methods for recovery of N.P.As, namely:Securitisation: means issuing securities by raising of receipts or funds byS.Cs/A.R.Cs, from Qualified Institutional Buyers by forming schemes foracquiring financial assets. The S.C/A.R.C shall maintain separate accounts foreach such scheme for every financial asset acquired, out of investments madeby a QIB and ensure that realizations of such financial assets are appliedtowards redemption of investments and payment of returns assured on suchinvestments under the relevant scheme.Asset Reconstruction: The S.Cs/A.R.Cs for the purpose of assetreconstruction shouldprovide for any one or more of the following measures:the proper management of the business of the borrower, by change in, or takeover of, the management of the business of the borrower.the sale or lease of a part or whole of the business of the borrower.rescheduling of payment of debts payable by the borrower.enforcement of security interest in accordance with the provisions of this Actsettlement of dues payable by the borrower.taking possession of secured assets in accordance with the provisions of thisAct.
*20Exemption from Registration of Security Receipt: The Act alsoprovides, notwithstanding anything contained in the Registration Act, 1908, forenforcement of security without Court intervention:(a) any security receipt issued by the S.C or A.R.C, as the case may be, undersection 7 of the Act, and not creating, declaring, assigning, limiting orextinguishing any right, title or interest to or in immovable property exceptin so far as it entitles the holder of the security receipt to an undividedinterest afforded by a registered instrument; or(b) any transfer of security receipts, shall not require compulsory registration.•The Guidelines for S.Cs/A.R.Cs registered with the R.B.I are:Act as an agent for any bank or FI for the purpose of recovering their duesfrom the borrower on payment of such fees or chargesAct as a manager between the parties, without raising a financial liability foritself;Act as receiver if appointed by any court or tribunal.Apart from above functions any S.C/A.R.C cannot commence or carryout otherbusiness without the prior approval of R.B.I.
*21•Right of TitleA securitisation receipt gives its holder a right of title or interest in the financialassets included in securitisation. This definition holds good for securitisationstructures where the securities issued are referred to as Pass ThroughSecurities. The same definition is not legally inadequate in case of Pay ThroughSecurities with different tranches.•Thin Investor BaseThe SARFAESI Act has been structured to enable security receipts to be issuedand held by Qualified Institutional Buyers. It does not include N.B.F.C or otherbodies unless specified by the Central Government as a financial institution. Forexpanding the market for SR, there is a need to increase the investor base. Inorder to deepen the market for SR there is a need to include more buyercategories.•Investor AppetiteDemand for securities is restricted to short tenor papers and highest ratings.Also, it has remained restricted to senior tranches carrying highest ratings, whilethe junior tranches are retained by the originators as unrated pieces. This canbe attributed to the underdeveloped nature of the Indian market and poorawareness as regards the process of securitisation.
22THE SECURITISATION COMPANIES ANDRECONSTRUCTION COMPANIES (RESERVE BANK)GUIDELINES AND DIRECTIONS, 2003The R.B.I issued guidelines and directions relating to registration, measures ofA.R.Cs, functions of the company, prudential norms, acquisition of financial assets andrelated matters under the powers conferred by the SARFAESI Act, 2002.Defining N.P.As: Non-Performing Asset (N.P.A) means an asset for which:Interest or principal (or installment) is overdue for a period of 180 days or more from thedate of acquisition or the due date as per contract between the borrower and theoriginator, whichever is later;Interest or principal (or installment) is overdue for a period of 180 days or more from thedate fixed for receipt thereof in the plan formulated for realization of the assets.Interest or principal (or installment) is overdue on expiry of the planning period, where noplan is formulated for realization of the any other receivable, if it is overdue for a period of180 days or more in the books of the S.C or A.R.C.It is provided that the Board of Directors of a S.C or A.R.C may, on default by theborrower, classify an asset as a N.P.A even earlier than the period mentioned above.
23THE RECOMMENDATIONS OF THE HIGH LEVELCOMMITTEE ON CORPORATE DEBT ANDSECURITISATION, 2005•The recommendations of the High Level Committee on Corporate Debt andSecuritisation (Chairman: Dr.R.H.Patil) in 2005 proved to be one of the turningpoint towards the development of the corporate debt and securitisation market.Some of the key recommendations included:Evolve a consensus on the affordable rates and levels of stamp duty on debtassignment, Pass through Certificates (PTCs) and security receipts (SRs) acrossStates.An explicit tax pass-through treatment to securitisation SPVs / Trust SPVsshould be provided. Wholesale investors should be permitted to invest in andhold units of a close-ended passively managed mutual fund whose sole objectiveis to invest its funds in securitised paper.Large-sized NBFCs and non-NBFCs corporate bodies established in India may bepermitted to invest in SRs as Qualified Institutional Buyers. Private equity fundsregistered with SEBI as venture capital funds (VCFs) may also be permitted toinvest in SRs within the limits that are applied for investment by VCFs intocorporate bonds
24R.B.I GUIDELINES FOR SECURITISATION OFSTANDARD ASSETS (FEB 2006)•In February 2006, the RBI issued guidelines for securitisation of standard assetsby Banks, FIs and NBFCs. These guidelines provided the regulatory framework forseveral critical aspects of securitisation and are expected to establish a morerobust structured credit market. The guidelines were broadly as follows:Detailed guidelines to ensure ―arms length‖ relationship between theoriginator and the SPV, i.e. they are independent of each other.Credit enhancements provided by the originator for the first as well as secondlosses to be deducted from the capital.Any profit/premium arising on account of sale not allowed to be bookedupfront and is to be amortised over the life of the securities issued or to beissued by the SPVDisclosure by the originator, as notes to accounts, a comparative position fortwo years of the following items: 1) the total number and book value of loanassets securitised; 2) sale consideration received for the securitised assets andgain/loss on sale on account of securitisation; 3) form and quantum (outstandingvalue) of services provided by way of credit enhancement, liquiditysupport, post securitisation asset servicing, etc.
25R.B.I GUIDELINES FOR SECURITISATION OFSTANDARD ASSETS (FEB 2006)•Though some concerns have been raised regarding these guidelines as beingrestrictive, RBI is very clearly treading a cautious step adopting an officiallytermed ―incentive-compatible prudential approach towards securitisation‖ - anapproach defensible in the aftermath of the recent sub-prime episode in somedeveloped countries.•In 2007, the Securities Contracts (Regulation) Amendment Act 2007 amendedthe Securities Contract (Regulation) Act to include ―securitised instruments‖ inthe definition of ―securities‖. The amendment has paved way for listing andtrading of securitised debt on stock exchanges.
26GUIDELINES ON SECURITISATION AND DIRECTASSIGNMENT TRANSACTIONS (MAY 2012)•The RBI, in May 2012, put out the final guidelines on securitisation and directassignment of assets by banks.•This is the first time the RBI has issued separate guidelines for DirectAssignment transactions. Amongst the important new prescription in theguidelines is the prohibition of credit enhancement for direct assignmenttransactions. The other key stipulations are a Minimum Holding Period (MHP) forOriginators before off-loading the receivables and a Minimum RetentionRequirement (MRR) through the tenure of the transaction.•The guidelines are expected to have far-reaching implications on the issuancevolumes as well as the nature of the transaction structures adopted.
*•Key Originators segmentN.B.F.CsKey Investor segmentBanksTypically AAA ratings targeted, though wider ratings spread over past 2 years.•TenureMBS: door-to-door 12 to 20 years (Average 6 to 8 years)ABS: door-to-door 40 to 60 months (Average 18 to 24 months)•Investor YieldABS – fixed yieldRMBS – floating yield, linked to pool yield or external benchmark.28
30•Securitisation in India began in the early 1990s, with CRISIL rating the firstsecuritisation program in 1991-92, of an auto loan. Citibank securitized auto loans andplaced a paper with GIC mutual fund worth about Rs. 16 crores.•Securitisation began with the sale of consumer loan pools, and originators directlysold loans to buyers. They acted as servicers and collected installments due on theloans.•Creation of transferable securities backed by pool receivables (known as PTCs)became common in late 1990s. Through most of the 90s, securitisation of auto loanswas the mainstay of the Indian markets.•Initially it started as a device for bilateral acquisitions of portfolios of financecompanies.These were forms of quasi-securitisations, with portfolios moving from the balancesheetof one originator to that of another.•But from 2000 till today, Asset-Backed Securities (ABS) and Residential Mortgage-Backed Securities (RMBS) have fuelled the growth of the Indian securitisation market.HISTORY OF SECURITISATION IN INDIA
*34SECURITISATION IN INDIA (2000-2006)•The volume of issuances of securitised transactions grew exponentially beginning in2000 due to rapid growth of consumer finance. There were approximately 75 issuanceseach year after 2000 till 2006.•Securitisation of rated transactions increased from less than Rs.1,000crore in 1998, toover Rs.30,000 crore in 2004 – 05.•Number of originators was less than 5 in 2000, and rose to more than 20 in 2005.Thetop five originators accounted for 90% of the issuance volume in 2004-05.•Investors acceptance of securitized instruments also gradually improved, due topassing of SARFAESI Act in 2002.There was pressure on the resources of largeoriginators due to continued growth in consumer credit. The growth of debt funds, thelargest investors in securitized paper, also supported the expansion of thesecuritisation market .•ABS accounted for over two-thirds of issuances of all securitised issuances during thisperiod. From 2004 to 2005, 40% of vehicle finance was funded through ABS backed byauto loans.
35Scenario before Feb2006 GuidelinesScenario after Feb 2006Guidelines•Securitisation transactionsdominant (over 80% in FY06)•ABS is the key product, andABS issuance is dominated bybanks .•Surge in Direct Assignmenttransactions (75% in FY12)•Securitisation by banksgradually reduced - no bank-originated transactions in last2 years , although they arethe key investor segment.•Surge in ABS as well as RMBStransactions, and decline inLSO (Loan Sell-Off) issuances.
*•During FY2012, the securitisation market in India grew by 15% over theprevious year, in value terms. The number of transactions was also 32% higher inFY2012 than in the previous fiscal year.•LSO issuance has been witnessing a sharp decline since FY2009. LSO, or LoanSell-Off transactions were largely short-term in nature and the Originator wouldtypically disburse the loan with the specific intention of securitising it soonafter the disbursement.•RBI‘s draft guidelines issued in the first quarter of FY2011, specially therequirement of Minimum Holding Period (MHP) of 9 to 12 months, created apotential interest rate risk for the Originator and adversely affected the LSOissuance volume.39
41*•After the issuance of the securitisation guidelines in 2006, there has been a highpreference for ‗direct or bilateral assignment‘ of retail loan pools, i.e., direct sale of aselected loan pool by the ‗Originator‘ to the ‗Purchaser‘ together with limited creditsupport, as against securitisation which involves the sale of receivables to a SPV andissuance of PTCs by the SPV.•Over the past four years i.e. since FY2009, about 75-80% of the total number of ABS andRMBS transactions has been in the nature of direct assignment transactions. This is hugegrowth, considering the figures of 25% in FY2006, and 58% in FY2008.•The preference for par structures continued to be high in FY2012; ―premium‖ structuresaccounted for only 10% of the total number of ABS and RMBS issuance during the year asagainst 37% and 18% in FY2010 and FY2011, respectively. RBI‘s circular of January 2011notifying banks to consider only the par value of transactions for obtaining priority sectorbenefit on loans, was a huge factor contributing to the preference for ―par‖ structure.
•The number of ABS issues increased significantly by 58% in FY2012 to 178transactions.•The average deal size was lower at Rs. 146 crore in FY2012 compared toRs. 193 crore in FY2011. This was on account of higher number ofMicrofinance transactions executed in FY2012 at 65 that was about twicethe issuance in FY2011 at 34.•The total number of issuers in the ABS space increased from 23 to 33 assome microfinance entities entered the securitisation (or assignment)market.•Shriram Transport Finance Company, SREI Equipment Finance, IndiabullsFinancial Services Ltd., Sundaram Finance and Shriram City Union Financewere the largest Originators in FY2012, altogether contributing to over 60%of the total number of ABS issuances.43*
•In FY2012, Commercial Vehicle (CV) and Construction Equipment (CE)loans continued to be the key asset class accounting for two-thirds ofthe total ABS volumes.•The long and relatively stable track record of CV / CE lending in thecountry (also demonstrated through good performance of the pastpools) and the relatively larger size of CV / CE loan portfolios in theindustry have been the key factors for the popularity of this assetsegment in securitisation.•Microfinance and SME loans, which had a small share in securitisationin the previous year‘s emerged as the other key loan categories to besecuritised accounting for almost 11% each in FY2012 from about 7% and2% in FY2011.• However, there was some securitisation of Two Wheeler and ThreeWheeler loans in FY2012, a segment absent during the previous twoyears. 45*
•The number of RMBS issuances increased to 22 in FY2012 along with anincrease of 53% in value terms. However, the average deal size marginallyreduced to Rs. 349 crore in FY2012 from Rs. 359 crore in FY2011.•RMBS segment continued to be highly concentrated with HDFC and DewanHousing Finance, which together contributed to about 85% of all issuances.•Despite higher issuances seen in the year, the traditional obstacles to RMBS inIndia, viz., long tenure of RMBS paper, the lack of secondary marketliquidity, high stamp duty on transfer of security, tenure uncertainty, interestrate risk and prepayment risk, continued to hinder the growth of this segment.•Nevertheless, regulatory requirements—certain category of home loans qualifyas priority sector lending—provide the motive for trading in home loans too.Accordingly, banks were typically the investors in these transactions.47*
*48•Though retail loan securitisation improved in FY2012, the issuancevolume in India continues to remain subdued and concentrated among afew originators.•Around 75% of the market in FY2012 was essentially bilateral loan pooltrading, driven by the economics of priority sector lending targets. Itfollows that the investor segment is largely banks—mainly private sectorand foreign banks.•The final guidelines on securitization and bilateral assignments areexpected to result in a significant decline in volume of bilateralassignments given the prohibition on credit enhancements byoriginators in these transactions.•In addition to regulatory prescriptions, the pace of growth in loan booksize among key players would continue to be a basic determinant oflevel of securitisation activity.