Post on 25-Nov-2014
A STUDY ON SECURITIZATION –
CURRENT PRACTICES AND FUTURE PROSPECTSWITH SPECIAL REFERANCE TO BANKS HEADQUARTERED IN DELHI AND HARYANA
PRESENTED BYMUDASIR AHMED MIRTHE UNIVERSITY OF KASHMIR
CONTENTS OBJECTIVE OF THE STUDY. INTRODUCTION TO SECURITIZATION. SECURITIZATION IN INDIA. STUDY OF DATA ON SECURITIZATION IN BANKS
HEADQUARTERED WITHIN DELHI & HARYANA. RESULTS & RECOMMENDATIONS. LIMITATIONS OF THE STUDY. BIBLIOGRAPHY.
OBJECTIVE OF THE
STUDY
OBJECTIVE OF THE STUDYTHE STUDY IS CONDUCTED WITH THE OBJECTIVE OF PROVIDING AN INSIGHT INTO THE PREVALENT
PRACTICES AND FUTURE PROSPECTS FOR SECURITIZATION IN THE BANKS HEADQUARTERED
WITHIN THE AREA OF DELHI AND HARYANA. ACCORDINGLY, THE TERMS OF REFERENCE OF THE
STUDY ARE :
TO UNDERSTAND THE PREVALENT PRACTICES WITH RESPECT TO THE SECURITIZATION
MARKET IN THE AREA UNDER STUDY.
TO REVIEW THE IMPACT OF ENFORCEMENT OF PROVISIONS OF SARFAESI ACT AND OTHER
REGULATIONS.
TO ASCERTAIN WHETHER THE BANKS IN THE AREA UNDER STUDY ARE RESORTING TO SINGLE
LOAN SECURITIZATION AND THE RELATED TREATMENT GIVEN TO PROFIT/LOSS ON SUCH
SALES.
TO IDENTIFY ANY SECURITIZATION DEAL WITH EMBEDDED CREDIT DERIVATIVES OR ANY
OTHER SYNTHETIC SECURITIZATION STRUCTURE.
TO CHECK FOR INSTANCES WHERE THE SPVS CREATED BY BANKS HAVE ISSUED SHORT-TERM
PASS-THROUGH CERTIFICATES BACKED BY LONG-TERM ASSETS IN ORDER TO GAUGE THE
METHOD EMPLOYED TO MANAGE ANY RESULTANT ASSET-LIABILITY MISMATCH.
INTRODUCTION TOSECURITIZATION
ORIGINATION OF THE CONCEPT
THE ORIGINATE-TO-DISTRIBUTE MODEL.
A VARIATION OF TRADITIONAL ORIGINATE-TO-HOLD MODEL.
INTERMEDIARIES ORIGINATE LOANS WITH THE INTENTION OF
TRANSFERRING THE ASSET AND ITS COMMENSURATE RISK
OUT OF THEIR BALANCE SHEET TO ANOTHER ENTITY.
SEPARATION OF RISK ORIGINATION FROM AGGREGATION.
SECURITIZATION DEFINED
A PROCESS OF POOLING AND REPACKAGING OF
HOMOGENOUS ILLIQUID FINANCIAL ASSETS INTO
MARKETABLE SECURITIES THAT CAN BE SOLD TO INVESTORS.
A CREDIT ARBITRAGE TRANSACTION THAT PERMITS FOR
MORE EFFICIENT MANAGEMENT OF RISKS BY ISOLATING A
SPECIFIC POOL OF ASSETS FROM THE ORIGINATOR'S BALANCE
SHEET
MAJOR STEPS
1) CREATION OF A SPECIAL PURPOSE VEHICLE (SPV) TO HOLD
THE FINANCIAL ASSETS UNDERLYING THE SECURITIES;
2) SALE OF THE FINANCIAL ASSETS BY THE ORIGINATOR OR
HOLDER OF THE ASSETS TO THE SPECIAL PURPOSE VEHICLE,
WHICH WILL HOLD THE ASSETS AND REALIZE THE ASSETS;
3) ISSUANCE OF SECURITIES BY THE SPV, TO INVESTORS,
AGAINST THE FINANCIAL ASSETS HELD BY IT.
STRUCTURE OF SECURITIZATION
STAGES IN THE PROCESS OF SECURITIZATION
THE ORIGINATOR DETERMINES WHICH ASSETS HE WANTS TO SECURITIZE FOR RAISING
FUNDS.
THE SPV IS FORMED.
THE SPV IS FUNDED BY INVESTORS AND ISSUES SECURITIES TO THE INVESTORS.
THE SPV ACQUIRES THE RECEIVABLES UNDER AN AGREEMENT AT THEIR DISCOUNTED
VALUE.
THE SERVICER FOR THE TRANSACTION IS APPOINTED, NORMALLY THE ORIGINATOR.
THE DEBTORS ARE /ARE NOT NOTIFIED DEPENDING ON THE LEGAL REQUIREMENTS.
THE SERVICER COLLECTS THE RECEIVABLES, USUALLY IN AN ESCROW MECHANISM, AND
PAYS OFF THE COLLECTION TO THE SPV.
SECURITIZATION PROCESS (cntd…..)
THE SPV EITHER PASSES THE COLLECTION TO THE INVESTORS, OR REINVESTS
THE SAME TO PAY OFF TO INVESTORS AT STATED INTERVALS.
IN CASE OF DEFAULT, THE SERVICER TAKES ACTION AGAINST THE DEBTORS AS
THE SPV’S AGENT.
WHEN ONLY A SMALL AMOUNT OF OUTSTANDING RECEIVABLES ARE LEFT TO
BE COLLECTED, THE ORIGINATOR MAY CLEAN UP THE TRANSACTION BY
BUYING BACK THE OUTSTANDING RECEIVABLES.
AT THE END OF THE TRANSACTION, THE ORIGINATOR’S PROFIT, IF RETAINED
AND SUBJECT TO ANY LOSSES TO THE EXTENT AGREED BY THE ORIGINATOR, IN
THE TRANSACTION IS PAID OFF.
PARTIES INVOLVED
MAIN PARTIES1. THE ORIGINATOR: THE ENTITY ON WHOSE BOOKS THE
ASSETS TO BE SECURITIZED EXIST.
2. THE SPECIAL PURPOSE VEHICLE (SPV): THE ENTITY,
WHICH BUYS THE ASSETS TO BE SECURITIZED FROM THE
ORIGINATOR.
3. THE INVESTORS: THE ENTITIES WHO INVEST IN THE
SECURITIES.
PARTIES INVOLVED (contd…)
OTHER PARTIES THE OBLIGOR/S: THE ORIGINATOR'S DEBTOR THAT IS THE BORROWER OF THE
ORIGINAL LOAN.
THE RATING AGENCY : THE AGENCY THAT RATES THE STRUCTURE.
ADMINISTRATOR OR SERVICER: THE PARTY THAT COLLECTS THE PAYMENT DUE
FROM THE OBLIGOR/S AND PASSES IT TO THE SPV, FOLLOWS UP WITH DELINQUENT
BORROWERS AND PURSUES LEGAL REMEDIES AVAILABLE AGAINST THE
DEFAULTING BORROWERS.
AGENT AND TRUSTEE: THE PARTY THAT ACCEPTS THE RESPONSIBILITY FOR
OVERSEEING THAT ALL OTHER THE PARTIES TO THE SECURITIZATION DEAL
PERFORM IN ACCORDANCE WITH THE SECURITIZATION TRUST AGREEMENT.
STRUCTURER: THE PARTY THAT BRINGS TOGETHER THE OTHER PARTIES REQUIRED
TO EXECUTE A SECURITIZATION DEAL.
PARTIES INVOLVED (contd…)
THE REGULATORS WHOSE PRINCIPAL CONCERNS RELATE TO CAPITAL
ADEQUACY, LIQUIDITY, AND CREDIT QUALITY OF THE STRUCTURE, AND
BALANCE SHEET TREATMENT OF THE TRANSACTION.
CREDIT ENHANCER: THE PARTY THAT PROVIDES A COVER TO SPV OR INVESTORS
IN RESPECT OF ANY FUTURE LOSSES ASSOCIATED WITH THE POOL OF ASSETS.
LIQUIDITY PROVIDER: THE PARTY THAT PROVIDES THE FACILITY TO HELP
SMOOTHEN THE TIMING DIFFERENCES FACED BY THE SPV BETWEEN THE RECEIPT
OF CASH FLOWS FROM THE UNDERLYING ASSETS AND THE PAYMENTS TO BE
MADE TO INVESTORS.
SPECIALIST FUNCTIONARIES SUCH AS LEGAL AND TAX COUNSELS,
ACCOUNTING FIRMS, POOL AUDITORS, ETC.
TYPES OF SECURITIZATION
TYPES OF SECURITIZATION
ASSET BACKED SECURITIZATION
FUTURE FLOW SECURITIZATION
TYPES OF SECURITIZATION (contd…)
ASSET BACKED SECURITIZATION: ASSET BACKED
SECURITIZATION INVOLVES THE CONVERSION OF
EXISTING ASSETS INTO MARKETABLE SECURITIES.
FUTURE FLOW SECURITIZATION: FUTURE FLOW
SECURITIZATION INVOLVES THE CONVERSION OF FUTURE
CASH FLOWS INTO MARKETABLE SECURITIES.
TYPES OF SECURITIZATION STRUCTURE
TYPES OF SECURITIZATION STRUCTURE
CASH FLOW STRUCTURE
SYNTHETIC STRUCTURE
TYPES OF SECURITIZATION STRUCTURE (contd…)
IN A CASH FLOW-BASED SECURITIZATION, THE OWNERSHIP
OF THE ASSETS WHOSE CASH FLOWS ARE TO BE SECURITIZED,
ARE ACTUALLY TRANSFERRED TO THE SPV.
IN A SYNTHETIC” SECURITIZATION, THE CASH FLOWS
AND/OR ECONOMIC EXPOSURE ARE TRANSFERRED TO THE
SPV THROUGH THE USE OF A CREDIT DERIVATIVE.SYNTHETIC
SPVS DO NOT ASSUME ACTUAL OWNERSHIP OF ANY ASSETS.
SECURITIES ISSUED BY SPV
ON THE BASIS OF UNDERLYING
ASSET BACKED SECURITIES
MORTGAGE BACKED SECURITIES
SECURITIES ISSUED BY SPV (contd…)
ON THE BASIS OF UNDERLYING
ASSET BACKED SECURITIES (ABS): SECURITIES ISSUED BY SPV IN A
SECURITIZATION TRANSACTION ARE REFERRED TO AS ASSET BACKED
SECURITIES (ABS) BECAUSE INVESTORS RELY ON THE PERFORMANCE OF
THE ASSETS THAT COLLATERALIZE THE SECURITIES. THE ASSET IN
QUESTION COULD VARY FROM AUTO LOAN/LEASE/HIRE PURCHASE, CREDIT
CARD, CONSUMER LOAN, STUDENT LOAN, HEALTHCARE RECEIVABLES AND
TICKET RECEIVABLES TO EVEN FUTURE ASSET RECEIVABLES.
MORTGAGE BACKED SECURITIES (MBS): MORTGAGE BACKED
SECURITIES (MBS) ARE THE SECURITIES BACKED BY MORTGAGE LOANS
THAT IS LOANS SECURED BY SPECIFIED REAL ESTATE PROPERTY, WHEREIN
THE LENDER HAS THE RIGHT TO SELL THE PROPERTY, IF THE BORROWER
DEFAULTS.
SECURITIES ISSUED BY SPV (contd…)
ON THE BASIS OF STRUCTURE PASS-THROUGH CERTIFICATES: PASS-THROUGH
CERTIFICATES ARE IN THE NATURE OF PARTICIPATION
CERTIFICATES THAT ENABLE THE INVESTORS TO TAKE A DIRECT
EXPOSURE ON THE PERFORMANCE OF THE SECURITIZED
ASSETS.
PAY-THROUGH CERTIFICATES: PAY –THROUGH
CERTIFICATES GIVE INVESTORS ONLY A CHARGE AGAINST THE
SECURITIZED ASSETS, WHILE THE ASSETS THEMSELVES ARE
OWNED BY THE SPV.
CREDIT ENHANCEMENT
CREDIT ENHANCEMENT REFERS TO ANY ACTIVITY THAT
AIMS AT REDUCING THE RISK ASSOCIATED WITH
SECURITIZED INSTRUMENTS AND INCREASING THE
CREDITWORTHINESS OF THE SPV ISSUING SUCH
FINANCIAL INSTRUMENTS.
CREDIT ENHAANCEMENT CAN BE OF TWO TYPES:
1. INTERNAL CREDIT ENHANCEMENT
2. EXTERNAL CREDIT ENHANCEMENT.
TYPES OF CREDIT ENHANCEMENT
INTERNAL CREDIT ENHANCEMENT REFERS TO CREDIT
ENHANCEMENT PROVIDED INTERNALLY BY THE SPV.
TYPES OF INTERNAL CREDIT ENHANCEMENT:
EXCESS SPREAD.
OVERCOLLATERALIZATION.
RESERVE ACCOUNT.
CREDIT TRANCHING.
CASH COLLATERAL.
TYPES OF CREDIT ENHANCEMENT
EXTERNAL CREDIT ENHANCEMENT REFERS TO CREDIT
ENHANCEMENT PROVIDED BY THIRD PARTIES.
TYPES OF EXTERNAL CREDIT ENHANCEMENT:
LETTR OF CREDIT.
INSURANCE.
THIRD PARTY GUARANTEE.
CASH COLLATERAL ACCOUNT.
ADVANTAGES OF SECURITIZATION
ADVANTAGES TO THE ORIGINATOR
ADVANTAGES TO THE INVESTOR
LIQUIDITY
REDUCTION IN ASSET-LIABILTY
MISMATCH.
REDUCED FUNDING COSTS.
LOWER CAPITAL REQUIREMENTS.
TRANSFER OF RISKS.
CONVERSION OF NON-MARKETABLE
ASSETS INTO MARKETABLE
SECURITIES.
WIDER MARKET ACCESS.
LOW EVENT RISK.
STRUCTURED ISSUANCES.
HIGHER YIELDS FO
SIMILAR/LOWER RISK.
DIVERSIFICATION OF INVESTMENT
OPPORTUNITIES
DISADVANTAGES OF SECURITIZATION
DISADVANTAGES TO THE ORIGINATOR
DISADVANTAGES TO THE INVESTOR
REDUCTION IN PORTFOLIO
QUALITY.
INCREASED COSTS.
SIZE LIMITATIONS.
LOWER CAPITAL
REQUIREMENTS.
RISKS OF IMPAIRMENT.
EXPOSURE TO CREDIT RISK.
RISK OF PREPAYMENT.
REINVESTMENT RISK.
COMMINGLING RISK.
SEVICER RISK.
RISKS TO THE FINANCIAL SYSTEM
REPLACES ONE INTERMEDIARY WITH MANY.
SEGREGATES RISK ORIGINATION FROM RISK
AGGREGATION.
ENCOURAGES TRANSFER OF RISK WHICH RESULTS
IN POOR RISK HANDLING MEASURES.
RECENT GLOBAL FINANCIAL CRISES WHICH
DISCLOSED FAILURE OF CREDIT RATING AGENCIES.
SECURITIZATION IN INDIA
SECURITIZATION IN INDIA THE FIRST SECURITIZATION TRANSACTION IN INDIA WAS
COMPLETED IN 1991.
SECURITIZATION HAS BECOME A SOLID SOURCE OF FUNDING VIA THE CAPITAL MARKETS IN INDIA. ALTHOUGH THE MARKET REMAINS PREDOMINANTLY DOMESTIC, WITH RATINGS ASSIGNED WITHIN THE NATIONAL SCALE, EFFORTS TO ACCESS THE INTERNATIONAL CAPITAL MARKETS ARE BEING EXPLORED BY LARGER ORIGINATORS.
THE GROWTH IN THE INDIAN SECURITIZATION MARKET HAS BEEN LARGELY FUELLED BY THE REPACKAGING OF RETAIL ASSETS AND RESIDENTIAL MORTGAGES OF BANKS AND FINANCIAL INSTITUTIONS (FIS).
ASSET BACKED SECURITIZATION (ABS) IS THE LARGEST PRODUCT CLASS.THE MORTGAGE BACKED SECURITIES (MBS) MARKET HAS BEEN RATHER SLOW IN TAKING OFF DESPITE A GROWING HOUSING FINANCE MARKET DUE TO THE LONG MATURITY PERIODS AND THE RISK ARISING FROM PREPAYMENT / REPRICING OF THE UNDERLYING LOAN.
SECURITIZATION IN INDIA (contd…) SECURITIZATION IN INDIA LARGELY ADOPTS A TRUST STRUCTURE WITH THE
UNDERLYING ASSETS BEING TRANSFERRED BY WAY OF SALE TO A TRUSTEE
COMPANY. THE SPV, FORMED AS A TRUSTEE COMPANY, ISSUES SECURITIES
THAT ARE EITHER PASS THROUGH CERTIFICATES OR PAY THROUGH
CERTIFICATES (PTC). THE TRUSTEE IS THE LEGAL OWNER OF THE UNDERLYING
ASSETS IN BOTH THE SCENARIOS.
ISSUANCE VOLUME BY NUMBER OF TRANSACTIONS IS SIGNIFICANT IN INDIA,
WITH DOZENS OF DEALS COMING TO MARKET EACH YEAR ACROSS ALL ASSET
CLASSES. YET SIGNIFICANT GROWTH POTENTIAL WITHIN THIS MARKET
REMAINS, WITH PUBLIC SECTOR BANKS STILL NOT HAVING ENTERED THE
SECURITIZATION ARENA.
REGULATIONS RELATED TO SECURITIZATION IN INDIA
INDIAN FINANCIAL MARKETS HAVE BEEN WITNESSING SECURITIZATION DEALS
SINCE 1990 WITH THE FIRST SECURITIZATION DEAL TAKING PLACE CITIBANK AND
GIC MUTUAL FUND IN 1991 FOR RS 160 MILLION. ON THE LINES OF SECURITIZATION,
TWO MAJOR TYPES OF FINANCIAL TRANSACTIONS CAN BE WITNESSED IN INDIAN
MARKETS:
SECURITIZATION OF STANDARD ASSETS.
SALE OF NPAS TO RC/SCS AND/OR BANKS/FIS.
THE SECURITIZATION OF STANDARD ASSETS INVOLVES THE CORE PROCESS OF
SECURITIZATION WHEREBY AN ORGANIZATION CHERRY PICKS LOAN ASSETS AND
SELLS THEM TO AN SPV WHICH IN TURN ISSUES SECURITIES TO INVESTORS AGAINST
SUCH LOAN ASSETS. ON THE OTHER HAND, THE SALE OF NPAS TO RC/SCS OR OTHER
FIS INVOLVES THE SELLING OF DISTRESSED LOANS TO THESE INSTITUTIONS BY
BANKS/FIS AND GETTING THEIR BALANCE SHEET CLEARED OF NPAS.
REGULATIONS RELATED TO SECURITIZATION IN INDIA (contd…)
THE MOST SIGNIFICANT STEP TOWARDS REGULATION OF
SECURITIZATION MARKET WAS THE ENACTMENT OF SARFAESI ACT IN
2002.
OTHER MAJOR STEPS WERE THE ISSUANCE OF :
THE SECURITISATION COMPANIES AND RECONSTRUCTION
COMPANIES (RESERVE BANK) GUIDELINES AND DIRECTIONS IN 2003.
GUIDELINES ON PURCHASE/SALE OF NON PERFORMING ASSETS
DATED 13 JULY 2005.
GUIDELINES ON SECURITISATION OF STANDARD ASSETS DATED
FEBRUARY 1, 2006.
SARFAESI ACT, 2002 THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND
ENFORCEMENT OF SECURITY INTEREST ACT, 2002 (SARFAESI ACT) IS A MIX OF
THREE DIFFERENT THINGS -
SECURITISATION,
ASSET MANAGEMENT COMPANIES AND
ENFORCEMENT OF SECURITY INTERESTS ON LOAN DEFAULTS TO BANKS.
THE BASIC INTENTION BEHIND THIS ACT IS TO STRENGTHEN CREDITOR
RIGHTS THROUGH FORECLOSURE AND ENFORCEMENT OF SECURITIES BY
BANKS AND FINANCIAL INSTITUTIONS. BY CONFERRING ON LENDERS THE
RIGHT TO SEIZE AND SELL ASSETS HELD AS COLLATERAL IN RESPECT OF
OVERDUE LOANS, IT ALLOWS BANKS AND FINANCIAL INSTITUTIONS TO
RECOVER THEIR DUES PROMPTLY WITHOUT GOING THROUGH A COSTLY AND
TIME-CONSUMING LEGAL PROCESS.
SARFAESI ACT (contd…)
THE ACT CONTAINS VI CHAPTERS AND 42 SECTIONS:
CHAPTER I - PRELIMINARY SHORT TITLE AND COMMENCEMENT.
CHAPTER II - REGULATION OF SECURITISATION & RECONSTRUCTION OF
FINANCIAL ASSETS OF BANKS & FINANCIAL INSTITUTIONS.
CHAPTER III - ENFORCEMENT OF SECURITY INTEREST.
CHAPTER IV - CENTRAL REGISTRY.
CHAPTER V - OFFENCES AND PENALTIES.
CHAPTER VI - MISCELLANEOUS.
THE ACT ADDRESSED TWO MAJOR ISSUES:
1. ASSET RECONSTRUCTION.
2. ENFORCEMENT OF SECURITY INTEREST.
SARFAESI ACT (contd…) THE SARFAESI ACT AIMED AT ERADICATING THE SHORTCOMINGS OF ALL
THE PREVIOUS LEGISLATIONS FOR RECOVERY OF DEBTS AND TO BRING
THE FINANCIAL INSTITUTIONS AT PAR WITH THE REST OF THE WORLD BY
STRESSING MORE ON THE RECOVERY PART RATHER THAN
ASCERTAINMENT PART FOR DUES
THE CONCEPT OF AN ARC (ASSET RECONSTRUCTION COMPANY) WAS
INTRODUCED IN THIS ACT.
THE INTENT OF THE ACT FOCUSES ON THE BAD LOANS ARISING OUT OF
A SYSTEMATIC BANKING CRISIS IN THE COUNTRY AND NOT ON THE BAD
LOANS ORIGINATING FROM BAD LENDINGS IN THE USUAL BANKING
OPERATIONS.
THE ACT ALSO EMPOWERS SECURED CREDITORS TO ENFORCE THEIR
SECURITY INTEREST IN THE ASSETS WITHOUT THE INTERVENTION OF
THE COURT.
THE SECURITISATION COMPANIES AND RECONSTRUCTION COMPANIES (RESERVE BANK) GUIDELINES AND DIRECTIONS
TREATMENT OF NPA’S.
REGISTRATION OF SC/RCs AND
MATTERS INCIDENTAL THERETO.
OWNED FUND.
PERMISSIBLE BUSINESS.
ASSET RECONSTRUCTION
SECURITISATION
CAPITAL ADEQUACY
REQUIREMENTS.
DEPLOYMENT OF FUNDS.
ACCOUNTING YEAR.
ASSET CLASSIFICATION.
INVESTMENTS.
INCOME RECOGNITION.
DISCLOSURES IN THE BALANCE SHEET.
INTERNAL AUDIT
EXEMPTIONS
THESE GUIDELINES ISSUED BY THE RBI IN 2003 COVERED THE MAJOR ASPECTS REALATING TO SECURITIZATION DELAS. THE MAIN PROVISIONS ARE:
EXCEPTIONS TO SECURITIZATION A LIEN ON ANY GOODS, MONEY OR SECURITY GIVEN BY OR UNDER THE
INDIAN CONTRACT ACT OR THE SALE OF GOODS ACT OR ANY OTHER LAW FOR THE TIME BEING IN FORCE.
A PLEDGE OF MOVABLES. CREATION OF ANY SECURITY IN ANY AIRCRAFT AND ANY VESSEL. ANY CONDITIONAL SALE, HIRE PURCHASE OR LEASE OR ANY OTHER
CONTRACT IN WHICH NO SECURITY INTEREST HAS BEEN CREATED. ANY SECURITY INTEREST FOR SECURING REPAYMENT OF ANY FINANCIAL
ASSET, NOT EXCEEDING RS. 1,00,000. ANY SECURITY INTEREST CREATED IN AGRICULTURAL LAND. ANY CASE IN WHICH THE AMOUNT DUE IS LESS THAN 20% OF THE PRINCIPAL
AMOUNT AND ANY RIGHTS OF AN UN-PAID SELLER AND ANY PROPERTY NOT LIABLE TO
ATTACHMENT OR SALE AS PER THE CIVIL PROCEDURE CODE.
CHARACTERISTICS OF THE INDIAN SECURITIZATION MARKET
THE MAIN CHARACTERISTICS OF INDIAN SECURITIZATION MARKET ARE:
INDIA IS A SIGNIFICANT SECURITIZATION MARKET IN ASIA AND IT DISPLAYS A SET
OF UNIQUE FEATURES THAT DISTINGUISH IT FROM OTHER JURISDICTIONS.
SENIOR NOTES ARE GENERALLY ENHANCED THROUGH A CASH RESERVE OR
GUARANTEE PROVIDED BY A HIGHLY RATED INSTITUTION.
NATIONAL RATINGS IN INDIA DENOTE TIMELY PAYMENT OF INTEREST AS WELL AS
PRINCIPAL. THIS IS PROBABLY THE MAIN DIFFERENCE TO MOST OTHER
JURISDICTIONS, WHERE GENERALLY ONLY TIMELY PAYMENT OF INTEREST
APPLIES.
THE INVESTOR BASE IS LIMITED, COMPRISING MUTUAL FUNDS, INSURANCE
COMPANIES, NBFCS AND A FEW PRIVATE SECTOR BANKS.
MOST INVESTMENTS IN SECURITIZED PAPER ARE MADE ON A “HOLD TO MATURITY”
BASIS ALTHOUGH PASS-THROUGH CERTIFICATES ARE NOW RECOGNIZED AS
SECURITIES AND ACTIVELY TRADED ON STOCK EXCHANGES.
SOME MAJOR SECURITIZATION DEALS IN INDIA:
FIRST SECURITIZATION DEAL IN INDIA BETWEEN CITIBANK AND
GIC MUTUAL FUND IN 1991 FOR RS 160 MILLION.
L&T RAISED RS 4,090 MILLION THROUGH THE SECURITIZATION
OF FUTURE LEASE RENTALS TO RAISE CAPITAL FOR ITS POWER
PLANT IN 1999.
INDIA’S FIRST SECURITIZATION OF PERSONAL LOAN BY
CITIBANK IN 1999 FOR RS 2,841 MILLION.
INDIA’S FIRST MORTGAGE BACKED SECURITIES ISSUE (MBS) OF
RS 597 MILLION BY NHB AND HDFC IN 2001.
SECURITIZATION OF AIRCRAFT RECEIVABLES BY JET AIRWAYS
FOR RS 16,000 MILLION IN 2001 THROUGH OFFSHORE SPV.
INDIA’S FIRST SALES TAX DEFERRALS SECURITIZATION BY
GOVERNMENT OF MAHARASHTRA IN 2001 FOR RS 1,500 MILLION. .
MAJOR SECURITIZATION DEALS IN INDIA (contd…)
INDIA’S FIRST DEAL IN THE POWER SECTOR BY KARNATAKA ELECTRICITY BOARD
FOR RECEIVABLES WORTH RS 1,940 MILLION AND PLACED THEM WITH HUDCO.
INDIA’S FIRST COLLATERALIZED DEBT OBLIGATION (CDO) DEAL BY ICICI BANK IN
2002
INDIA’S FIRST FLOATING RATE SECURITIZATION ISSUANCE BY CITIGROUP OF RS
2,810 MILLION IN 2003. THE FIXED RATE AUTO LOAN RECEIVABLES OF CITIBANK
AND CITICORP FINANCE INDIA INCLUDED IN THE SECURITIZATION
INDIA’S FIRST SECURITIZATION OF SOVEREIGN LEASE RECEIVABLES BY INDIAN
RAILWAY FINANCE CORPORATION (IRFC) OF RS 1,960 MILLION IN 2005. THE
RECEIVABLES CONSISTED OF LEASE AMOUNTS PAYABLE BY THE MINISTRY OF
RAILWAYS TO IRFC
INDIA’S LARGEST SECURITIZATION DEAL BY ICICI BANK OF RS 19,299 MILLION IN
2007. THE UNDERLYING ASSET POOL WAS AUTO LOAN RECEIVABLES.
SKS ENTERS INTO RS 200 CRORES SECURITIZATION DEAL WITH ICICI BANK IN 2009.
STUDY OF DATA
RESEARCH METHODOLOGY THE CURRENT STUDY IS A DESCRIPTIVE ONE DESIGNED TO EVALUATE
THE PRESENT SITUATION OF SECURITIZATION AND ITS FUTURE
PROSPECTS. THE RESEARCH IS FOCUSED ON THE BANKS
HEADQUARTERED IN DELHI AND HARYANA REGION.
THE RESEARCH WAS CARRIED BY QUESTIONNAIRE METHOD . THE
QUESTIONNAIRE WAS DRAFTED TO HIGHLIGHT THE BASIC ISSUES OF THE
SECURITIZATION DEALS ENTERED INTO BY THE BANKS IN ACCORDANCE
WITH THE ISSUES UNDER STUDY. THE QUESTIONS WERE BOTH CLOSE-
ENDED AND OPEN-ENDED.
IN ADDITION TO QUESTIONNAIRE, INFORMATION WAS ALSO GATHERED
BY WAY OF ONE-ON-ONE DISCUSSION WITH THE PEOPLE FROM VARIOUS
OTHER DEPARTMENTS OF THE RESPECTIVE BANKS, ASKING THEIR VIEWS
ABOUT THE GIVEN TOPIC.
DATA COLLECTIONAS THE FOCUS OF THE STUDY WAS THE SITUATION OF SECURITIZATION IN
THE BANKS HEADQUARTERED IN DELHI AND HARYANA REGION, THE DATA
WAS COLLECTED FROM THE RESPECTIVE BANKS. THE REGION OF DELHI
HEADQUARTERS FIVE BANKS:
PUNJAB NATIONAL BANK (PNB) -PUBLIC SECTOR BANK
ORIENTAL BANK OF COMMERCE (OBC) -PUBLIC SECTOR BANK
PUNJAB AND SINDH BANK(P&SB) - PUBLIC SECTOR BANK
CHINA TRUST BANK(CTBC) - FOREIGN BANK
BANK OF TOKYO AND MITSUBISHI - FOREIGN BANK
OUT OF THE BANKS MENTIONED ABOVE, A SAMPLE OF THREE BANKS VIZ PUNJAB
NATIONAL BANK, PUNJAB AND SINDH BANK AND ORIENTAL BANK OF COMMERCE
WAS STUDIED. A WELL DESIGNED QUESTIONNAIRE WAS ADMINISTERED TO ALL THE
THREE BANK RESPONDENTS TO GATHER INFORMATION ABOUT SECURITIZATION DEALS
AND OTHER RELATED ASPECTS.
Issue Punjab National Bank Oriental Bank of Commerce
Punjab & Sindh Bank
Active in Securitization Yes Yes Yes
Category of loan assets sold
NPA NPA NPA
Type of securitization ABS & MBS ABS ABS & MBS
Method of SecuritizationBoth Single Loan & Portfolio Approach
Both Single Loan & Portfolio Approach
Only Single loan Approach
Increase in Single Loan Sell downs
Yes Yes Yes
Treatment of Profit/Loss As per RBI guidelines As per RBI guidelines As per RBI guidelines
Criterion for selection of loans to be sold
Age of account. Recoverability.
Recoverability Type of loan
Decision making authority
Head Office Head office Head office. Zonal Offices ( Upto a limit)
Assets sold to RC/SCs Only ARCIL RC/SCs, Banks, NBFCs.
Securitization of Standard Assets
No No No
Types of Securities issued
None None None
ANALYSIS OF DATA
Asset-Liability mismatch due to issue of PTCs
No No No
Securitization deal with synthetic structures
No No No
Preferred Geographical Location of accounts to be sold
None NoneWhere stamp duties are
least
Impact of SARFAESI Act on Credit Appraisal
Positive but only in case of small and medium
borrowersPositive
Positive but only in case of small and medium
borrowers
Impact of the act on Recovery Climate
Positive Positive Positive
Main motives behind securitization/ sale
Cleaning of Balance Sheet.
Capital relief Resolution of NPAs
Clearance of Balance Sheet
Reduction of NPAs Capital relief
Recovery. Clearance of Balance
Sheet
Major impediments
Stamp Duties Reserve Price Treatment of Non-
Funded accounts
Low price offered by ARCs
Stamp duties Court Intervention
ANALYSIS OF DATA (contd…)
MAJOR ISSUES
TWO MAJOR ISSUES
SECURITIZATION OF STANDARD ASSETS
SALE OF NON-PERFORMING ASSETS
ISSUE I – SECURITIZATION OF STANDARD ASSETS
NOT PRACTICED BY THE BANKS UNDER STUDY. REASONS CITED
NO INCENTIVE. ENOUGH LIQUIDITY.
ADEQUATE CAPITAL.
HOWEVER: ADEQUATE CAPITAL AT PRESENT WON’T SERVE FUTURE GROWTH
OBJECTIVE. LIQUIDITY IS A SHORT TERM PHENOMENON. FUNDS LYING IDLE IN BALANCE SHEETS CAN BE PUT TO BETTER
USES.
ISSUE II – SALE OF NPAs
PRACTICED BY THE BANKS UNDER STUDY.
REASONS CITED RECOVERY OF BAD DEBTS. CLEARANCE OF BALANCE SHEET. CAPITAL RELIEF. RECYCLING OF FUNDS.
HOWEVER: USED WITH THE SOLE INTENTION OF CLEARING BALANCE
SHEETS. THE SPIRIT OF DISTRESSED LOAN RESTRUCTURING LOST. ARCs ACTING FOR THEIR OWN INTEREST.
RESULTS AND
RECOMMENDATIONS
RESULTS NO BANK IN THE AREA UNDER STUDY HAS UNDERTAKEN
SECURITIZATION OF STANDARD ASSETS AND ALL OF THE BANKS HAVE
UNDERTAKEN SALE OF DISTRESSED ASSETS ONLY.
IN REFERENCE TO THE SECURITIZATION/SALE OF NPAS, THE AMOUNT OF
SINGLE LOAN DEALS HAS INCREASED CONSIDERABLY.
THE GAINS ON SINGLE LOAN SECURITIZATION/SALE ARE DEALT IN
ACCORDANCE WITH RBI GUIDELINES.
KEEPING IN ACCORDANCE WITH THE RBI GUIDELINES, NONE OF THE
BANKS UNDER STUDY HAS BEEN INVOLVED IN ANY SECURITIZATION
STRUCTURE HAVING EMBEDDED DERIVATIVES OR ANY SYNTHETIC
SECURITIZATION STRUCTURE.
RESULTS (contd…) NO INSTANCE OF ISSUANCE OF PTCS AGAINST SECURITIZATION OF STANDARD
ASSETS AS SUCH NO INSTANCE OF ASSET-LIABILITY MISMATCH CAUSED BY
ISSUANCE OF SHORT-TERM PTCS BACKED BY LONG-TERM ASSETS.
POSITIVE IMPACT OF SARFAESI ACT ON RECOVERY CLIMATE, CREDIT
APPRAISAL, CREDIT FOLLOW-UP AND CREDIT POLICY MAKING.
THE MAIN MOTIVES FOR THE BANKS UNDER STUDY BEHIND
SECURITIZATION/SALE OF NPAS ARE:
CLEANSING OF BALANCE SHEET.
RECOVERY OF NPAS WITH MAXIMUM VALUE AND MINIMUM COST.
RECYCLING OF FUNDS.
CAPITAL RELIEF.
RISK REDUCTION.
RESULTS (contd…) MAIN IMPEDIMENTS FACED BY BANKS FOR SALE OF
NPAs: STAMP DUTY DISCRIMINATION.
DISPUTE ON RESERVE PRICE.
LESS NUMBER OF ARCs.
UNNECESSARY COURT INTERVENTION IN RECOVER PROCESS.
LESS CREDITWORTHINESS OF BORROWERS.
EXCLUSION OF AGRICULTURAL LAND AND RENTED PROPERTY FROM THE PURVIEW OF
SARFAESI ACT.
MAJOR SHORTCOMINGS IN PSBS CAUSING HINDRANCE FOR SECURITIZATION OF STANDARD ASSETS:
LACK OF COMPUTERISED DATA MANAGEMENT SYSTEMS.
LACK OF PROACTIVISM.
IGNORANCE OF PROVISIONS OF SECURITIZATION.
LESS BREADTH AND DEPTH OF MARKET.
LACK OF EXPERTS IN THE FIELD.
RECOMMENDATIONS DIRECTON TO PSBs TO INITIATE SECURITIZATION OF STANDARD ASSETS.
DIRCTION TO PSBs TO INSTALL HIGHLY INTEGRATED ACCOUNTING INFORMATION
SYSTEMS.
PSBs DIRECTED TO DEVELOP EXPERTS IN THE DIELD OF SECURITIZATION.
MARKET BREADTH AND DEPTH FOR SECURITIZATION DEALS.
INCREASED BY ALLOWING MORE INVESTORS TO PARTICIPATE IN THE SECURITIZED PAPER.
REDUCTION IN STAMP DUTIES .
AMENDMENTS IN TRANFER OF PRPERTY ACT AND STAMP DUTY ACT.
AGRICULTURAL LAND TO BE BROUGHT UNDER PURVIEW OF SARFAESI ACT.
NUMBER OF ARCS INCREASED.
WORKING OF EXISTING ARCs TO BE PUT UNDER SCANNER.
INTRODUCTION OF CMBS.
LIMITATIONS OF THE STUDY
LIMITATIONS
RESEARCH CARRIED WITH VARIABLES ACTING ON
RESEARCH SETTINGS, MAY DIFFER FROM ACTUAL
ENVIRONMENT.
DATA COLLECTED FROM INDIVIDUALS WHO ARE HUMANS
AND HAVE TENDENCY TO BEHAVE ARTIFICIALLY WHEN
BEING OBSERVED.
SUBJECTIVITY OF RESPONDENTS.
DENIEL ON PART OF SOME RESPONDENTS TO SUPPLY
FIGURES OF SALE CITING THE REASON OF SIGNING OF
NON DISCLOSURE AGREEMENT WITH THE BUYERS.
BIBLIOGRAPHY
BOOKS: INTRODUCTIO TO SECURITIZATION by “Frank J. Fabozzi and Vinod Kothari” CREDIT DERIVATIVES AND SYNTHETC SECURITIZATION by “Vinod Kothari” Securitization Within Economic Sector by “ANDREJ NOSKO” Marketing of financial services BY “Avdhani.V.K.”
WEBSITES: www.rbi.org.in www.nhb.org.in www.psbindia.com www.obcindia.com www.pnbindia.com www.managementparadIse.com www.scribd.com www.iloveindia.com www.projectspadarise.com www.openlearn.open.ac.in www.moneycontrol.coM
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