Long-term positives of RBI's securitisation guidelines outweigh concerns: CRISIL
09 February 2006
The Reserve Bank of India (RBI) released the final guidelines governing the securitisation of performing assets last week. CRISIL believes that these guidelines will:
- Encourage third-party services in securitisation transactions and create a vibrant market for independent service providers.
- Improve reporting and disclosure standards on securitisation for financial sector entities
- Clarify several regulatory ambiguities hindering market growth
- Enhance the predictability of financial sector entities' profits by eliminating upfront profit recognition at the time of securitisation.
The final guidelines break new ground on several issues, and could, in CRISIL's opinion, prove to be the building blocks of a more robust and vibrant securitisation market in the country. According to Ramraj Pai, head, structured finance ratings at CRISIL: "The final guidelines provide a robust regulatory and institutional framework for the orderly development of the market in the medium term."
Although the market might be affected in the short term by issues like higher capital allocation, prohibition of upfront profit recognition, and some ambiguity in the status of past transactions, CRISIL believes that there is ample scope for growth once the market realigns itself to the new regulatory framework.
Structurally, CRISIL sees the norms on capital allocation for credit enhancements actively driving originators towards mezzanine strips; this will in turn lead to the emergence of a new class of investors in non-AAA subordinate securities. Increased clarity on several pending regulatory issues will also spur several new investors to become active in the market. In sum, therefore, over the medium term, CRISIL continues to remain positive on the prospects for the securitisation market, despite reduced operational and structural flexibility for the market participants, and the expectation of subdued market conditions in the immediate future.