Graded Card Investor
July 20th, 2010 | 
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Graded Card Investor
SECURITISATION- SOME THOUGHTS
Securitization began in India in the early nineties. CRISIL rated the first securitization programme in 1991-92 when Citibank securitized a pool from its auto-loan portfolio and placed the paper with GIC Mutual Fund. The market for ABS has been stagnant largely for want of a suitable enabling regulatory framework. In the Indian context, the benefits that securitization can bring about can be quite noteworthy .The following merit contemplation in this regard. In a capital-short economy, an opportunity that permits effective use of available capital hardly requires any major emphasis. In addition, the ability to diversify one's funding base by reaching out to new investor markets, without increasing the financial leverage, which may otherwise have regulatory implications in some cases, is also of definite value. Obtaining harmonized funding most important to effective balance sheet management is particularly noteworthy from commercial banks' perspective. Reallocating risks in a planned and transparent manner helps in managing them better. Originators would also stand to benefit on account of promising gains that would accrue in the form of improvements in their credit and operating processes, as these come under detailed scrutiny.
Credit history of the Indian banking system indicates that substantial volumes of ABS of credit quality consistent with the rating compulsorily available. This would ensure continuous supply of assets that can be tailored to meet the credit appetites of investors. Institutional investors may not only benefit from such tailored issuances, but also may have access to invest into otherwise illiquid assets at superior yields without compromising on their credit standards.
According to John Henderson & Jonathon Scott, "securitization is defined as the progression which takes place when a lending institution’s assets are removed in one way or the other from its balance sheet and are funded instead by the investors who purchase a negotiable financial gadget evidencing this indebt ness, without recourse to the unusual lender''.
The securitization process would upgrade the level of sophistication of banking and finance in the country in the long run. This, combined with an appropriate regulatory framework, can make securitization an important catalyst in mobilizing domestic savings as well as attracting foreign capital, which can be of mammoth value, particularly in the context of capital requirements to develop the country's infrastructure sector. Securitizing project finance, telecom, toll road and other similar receivables could well become reality in the medium term future.
In developed countries there have been successful attempts to issue securitized gadgets based on future income streams - also known as future flow securitization - that take place from the use of physical assets income arising due to regulations, income from sale of natural resources.
Furthermore a wide variety of receivables have been securitized like, residential mortgages, credit card receivables, auto loans, swap contracts, trade receivables, unsecured term loans, collateralized bond/loan obligation, export receivables, finance leases, aircraft leases, finance leases, aircraft leases, insurance premia, firm and music album receivables, etc.
However, considering the stage of ripeness that the Indian financial markets are in, apart from the category of assets that are presently being securitized, there is a possibility that the securitization of the following kinds of receivables could gain popularity in the near future:-
Collateralized Loan/Bond Obligations
Housing Mortgage Loans
Credit Card Receivables
Two Wheeler Receivables
Consumer Durable Receivables
Trade Receivables
Aircraft Hire Purchase/Lease Receivables
Securitization is the only ray of trust for funding resource starved infrastructure sectors like power in India. For power utilities burdened with delinquent receivables from state electricity boards, securitization seems to be the only hope of meeting resource requirements. Securitization can help Indian borrowers with international assets in pricing the sovereign rating and placing an investment grade structure. An example, albeit failed, is that of Air India’s aborted attempt to securitize its North American ticket receivables.
Such structured operations can help premier corporate to obtain a superior pricing than a borrowing based on their non-investment grade corporate rating. A market for Mortgage backed Securities (MBS) in India can help large Indian housing finance companies (HFCs) in churning their portfolios and focus on what they know best – fresh asset origination. Indian HFCs have traditionally relied on bond finance and loans from the National Housing Bank (NHB). MBS can provide a vital source of funds for the HFCs. After the merger of India’s largest financial institution ICICI with ICICI Bank, ICICI, faced with SLR and other requirements, is actively seeking to launch a CLO to reduce its overall asset revelation. It appears to be only a matter of time before other Public Financial Institutions merge with other banks. Such mergers would result in the need for more CLOs in the foreseeable future.
Securitization effort will call for sizeable investments in time and resources. Hence, on a relative cost scale it can even be somewhat more expensive than other types of debt financing that may be available to a borrower, at least in the initial stages. However, it has been demonstrated that a continuing securitization program rather than a single deal often goes to reduce the costs, as economies of scale and expertise pick up over a period of time. Bearing this in mind, many securitization programs are run with a long-term strategic perspective. Growing importance of securitization is perhaps best illustrated by the volume through-put in the non-OECD world over the past few years.
Indian institutional investors also have a preference for liquidity in the ABS gadget. This preference exists more in the nature of a liquidity backstop rather than a demand for an active secondary market. A liquidity backstop facility is ideally provided by a credible entity working on a transparent benchmark. The facility also needs to be dignified through appropriate credentials. Support from a Government agency would be of considerable value in this regard. In addition to such preferences, institutional investors such as mutual funds also require reliable valuation benchmarks on ABS in order to appraise their portfolio performance.
Having discussed above, it is needless to say that, securitisation will help in converting ill liquid assets in to liquid assets.
About the Author
Dr.R.SRINIVASAN is a Post graduate in commerce and Management. He received his doctoral degree from Alagappa University in 1997. He is now Working as an ASSOCIATE PROFESSORin Post graduate and Research Department of Corporate Secretaryship at Bharathidasan Government College for Women (Autonomous), Pondicherry University, Puducherry.He currently teaches Accounting ,financial management and Research Methodology Subjects. Before Joining BGCW, he was teaching in SNR College, Coimbatore, Sindhi college, Chennai& T.S.Narayanasamy College, Chennai for eight years. He was with the industry for a short term at Salzar Electronics Pvt. Ltd, Coimbatore. He has about 20 years of teaching experience and having research experience of 15 years. His interests are in Accounting and finance, Capital Market, Quantitative Methods. He underwent the Faculty Development Programme at Indian Institute of Management Ahmedabad during 2000-01. He has presented 20 papers in national and international conferences and has published twenty papers in the areas of Finance and Human resource Management in National Journals. Co-authored a book titled, ‘Investors Protection, published by Raj Publications, New Delhi He has delivered lectures in contemporary finance topics at Pondicherry University. He is involved in consultancy projects for Godrej Saralee, Chennai in the areas of Statistical Applications. He has supervised a number of research projects in the area of corporate finance and Human Resource Management. He is the Board of examiner in corporate Secretaryship and Management for the past two decades.
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