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 grown.

According 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.

Lack 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.

CRISIL’s 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.

However, 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.

Secondly, 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 originator’s 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.

Future 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.

CRISIL 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.