There is growing interest in Securitisation
in India. Simply stated, Securitisation is a process through
which illiquid assets are packaged, converted into tradable
securities and sold to third party investors. Since the
early nineties when securitisation made its beginning
in India, the volume as well as the asset classes have
to CRISIL, in the latest issue of its publication CRISIL
INSIGHT, the rating agency has estimated the cumulative
volume of rated securitisation transactions at around
Rs. 1600 crores, covering several asset classes like car
receivables, truck receivables, receivables from Department
of Telecommunications and housing loan receivables. According
to CRISIL, one interesting development is the emergence
of several future flow securitisation transactions in
the manufacturing sector.
of clarity on certain legal, taxation, regulatory and
accounting issues has been one of the impediments to the
growth of securitisation in India. Recently, the Reserve
Bank of India (RBI) has set up an In-house Working Group
to address these issues. The Group is expected to identify
the issues and make recommendations for the orderly growth
of the Securitisation market.
experience with securitisation ratings has been very good
with a very high level of stability. There has been no
downgrading of rating or any case of default and the utilisation
level of credit enhancement has been low. Further, CRISIL
has been able to predict the asset performance with a
fair degree of accuracy. The credit enhancement levels
prescribed have withstood the pressures on asset quality
due to the slowdown in the economy.
while securitisation has several advantages and has a
lot potential, CRISIL believes that both, the originators
and the investors need to fully understand the risks and
the issues peculiar to the Indian context. Theoretically,
securitisation should be able delink the originators risk
from the securitisation transaction. However, this may
not be possible in the Indian context. This is because,
while the paper may be bankruptcy remote as regards the
originator legally, practically there are several problems.
There is dependence on the originator for servicing. In
case of bankruptcy of the originator, there are no alternative
servicers available easily. Even if third party servicers
exist, the efficacy is yet to be seen. The originator
has established a certain relationship with the borrowers.
It is not known if a third party servicer would be able
to collect the dues with the same level of efficiency
as the originator. Borrowers in India are not used to
paying any entity other than the original lender. They
may even refuse to pay the third party servicers, even
if they are duly authorised by the originator.
there is the co-mingling risk even in cases where the
originator is existing and operating. The risk that the
cashflows from the securitised pool would get mixed with
those of the originator is referred to as the co-mingling
risk. If the originators short term rating is not
high, this presents a problem. A time limit is specified
within which the pool cashflows should be transferred
to the designated account. This could pose a problem,
if the contracts in the securitised pool are geographically
dispersed across many states and regions. In view the
foregoing, it may not be possible to de-link the originator
risk from the securitisation transaction entirely.
flow securitisation is becoming increasingly popular.
There is an important difference between securitisation
of existing assets and future flow securitisation. In
case of future flow securitisation generation risk
is present. In case of existing assets, a product or service
has been delivered and thus the cashflows have been already
earned by the originator. Examples of existing assets
could be autoloan or housing loan receivables. Whereas
in the case of future flow, the originator has to perform
i.e. deliver a product or service in future and earn the
cashflows. One example of a future flow transaction could
be securitisation of future ticket sales of an airline
company. It may be noted that in this case, there is full
performance risk the airline has to exist, operate,
achieve ticket sales and collect successfully for the
cashflows to fructify. Therefore the credit quality of
the securitisation transaction would be closely linked
to the stand alone credit quality of the originator.
expects the market for securitisation to grow significantly
in the coming years. With the development of financial
markets, need for sophisticated products would increase.
Securitisation, as explained, can be gainfully employed
in a variety of situations. While the maximum applicability
would be in the financial sector, even the manufacturing
sector could make use of securitisation in certain situations.
While there are several demand drivers for securitisation,
CRISIL believes that balance sheet management is likely
to be the dominant motivating factor in securitisation
transactions in the near future.