The Indian securitisation market is adjusting well to the revised securitisation guidelines issued by the Reserve Bank of India in May 2012. After a brief pause following their introduction, market activity has resumed; total market volumes from May to mid-October 2012 were stable, at Rs. 34 billion (38 transactions), as against Rs.35 billion (38 transactions) for the corresponding period of the 2011-12 (refers to financial year, April 1 to March 31).
The revised guidelines inhibit credit enhancement in direct assignments, thereby diminishing the attractiveness of the route, leading to a shift to the pass through certificate (PTC) route. Transactions through the PTC route have accounted for more than 85% of the total issuances since the guidelines were issued, against less than 20% in 2011-12. The securitisation market is also gradually widening, through the addition of gold loans as an asset class and participation from a broader set of originators. CRISIL believes that resolution of a few additional issues can help sustain and increase market activity.
It is encouraging that the volumes have remained stable despite two of the revised regulatory norms reducing the availability of assets eligible for securitisation. First, the provision on minimum holding period that requires originators to hold assets longer to increase their seasoning. Secondly, the assets should conform to a maximum interest-rate of 8% above the investing banks’ base rate to receive priority sector status.
Says Mr. Pawan Agrawal, Senior Director, CRISIL Ratings, “There was a brief pause in securitisation activity after the issuance of the revised norms, during which time issuers accumulated eligible assets and evaluated the economics of securitisation. Since then, the market has resumed, and we have seen a structural shift toward the PTC route, which is more capital intensive for originators vis-à-vis direct assignments”. Of the 18 transactions rated by CRISIL after the revision in securitisation guidelines, 16 were through the PTC route. The aggregate of CRISIL-rated issuances is Rs.23 billion.
There are also clear signs that participation in the securitisation market is widening – gold loans have emerged as a new asset class, the number of originators accessing the securitisation market has increased to 25 from 21 in the previous year, and even insurance companies and wealth management clients have begun investing in a few transactions.
This recovery can be sustained over the coming quarters, if certain additional issues can also be addressed. Adds Mr. Agrawal, “Clarity on the income-tax liability of the trust set up for the PTC route will enhance confidence of investors. In addition, guidelines for resetting of credit enhancement will reduce the overall cost of securitisation for issuers, without necessarily reducing the protection for investors. Finally, active steps to enhance liquidity will attract long-term investors to the market.”
CRISIL has outstanding ratings on over 160 securitisation transactions, with aggregate amount exceeding Rs. 400 billion. These transactions continue to demonstrate a robust performance, with median collection efficiencies hovering around 98% in recent quarters.