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SECURITISATION IN INDIA – TOOL FOR RISK MANAGEMENT AND FUNDING

SECURITISATION IN INDIA – TOOL FOR RISK MANAGEMENT AND FUNDING, WITH SPECIAL REFERENCE TO THE NBFC SECTOR
Samrat ChaudhuriSakshi BhagatParitosh JunareMadras School of Economics
INTRODUCTION
Financial sector’s primary role is intermediation between ultimate savers and ultimate investors. Initially, it was the banks which were the intermediaries. As the financial sector evolved, other types of financial institutions came to the scene to undertake such intermediation directly, or between and among other intermediaries. A parallel development is the emergence of varieties of financial products, far removed from simple deposits and advances, delivering such intermediation. Securitisation, as we all know, is among the latest of such intermediating product.
What is Securitisation?
Securitisation in India started in the 1990’s. The first securitisation deal in India was between Citibank and GIC mutual fund. Citibank securitised the auto loans and directly sold it to GIC mutual fund for 160 million and also acted as the Servicer. The first few transactions that took place during the period from 1991-2000 were in the form of secured lending. However, after 2002, this segment saw some renewed activity with auto loans on the forefront.

Securitisation is the process of taking an illiquid asset, or group of assets and transforming it (or them) into a security. Illiquid asset means an asset that can’t be easily converted into cash i.e. house, cars, antiques, long-term debt etc. In the normal course, assets like loans held by banks or Non-Banking Financial Companies (NBFCs) are expected to yield a quantifiable stream of income in the future (e.g. EMIs etc.). However, since this income is yet to be realised, it cannot be brought onto their books immediately. Through the process of securitisation, entities try to encash these future cash flows.

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Securitisation means the conversion of existing or future cash in-flows into tradable security, which is sold in the market. The assets are sold to a bankruptcy remote Special Purpose Vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV. This process enhances liquidity in the market. This serves as a useful tool, especially for financial companies, as it helps them raise funds.

There are many types of securitisation such as Asset Backed Securitisation (ABS), Mortgage Backed Securitisation (MBS), Collateralized Debt Obligation (CDO) etc.An ABS is a financial security collateralized by a pool of assets such as loans, leases, credit card debt or receivables. ABS allows issuers to generate more cash which is used for more lending while giving investors the opportunity to invest in a wide variety of income-generating assets. Usually, the underlying assets of an ABS are illiquid and can’t be sold on their own. But pooling the assets together and creating a financial security, a process called securitisation, enables the owner of the assets to make them marketable. The underlying assets of these pools may be home loans, automobile loans, credit card receivables, student loans or other expected cash flows.

For instance, assume that company X is in the business of providing automobile loans. If a person wants to borrow money to buy a car, company X lends to that person the cash, and the person is obligated to repay the loan with a certain amount of interest. Perhaps company X makes so many loans that it runs out of cash to continue making more loans. company X can then package its current loans and sell them to Investment firm Y, thus receiving cash that it can use to make more loans.

Investment firm Y will then sort the purchased loans into different groups called tranches. These tranches are groups of loans with similar characteristics, such as maturity, interest rate and expected risk and return. Next, investment firm Y will issue securities that are similar to typical bonds on each tranche it creates. Individual investors then purchase these securities and receive the cash-flows from the underlying pool of automobile loans.

A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
A collateralized debt obligation (CDO) is a structured financial product that pools together cash flow-generating assets and repackaging the asset pool into discrete tranches that can be sold to investors. A collateralized debt obligation is named for the pooled assets — such as mortgages, bonds and loans — which are essentially debt obligations that serve as collateral for the CDO. The tranches in a CDO vary substantially in their risk profiles. The senior tranches are usually safer since they have first priority on payback from the collateral in the event of default. Consequently, the senior tranches of a CDO generally have a higher credit rating and offer lower coupon rates than the junior or subordinate tranches, which offer higher coupon rates to compensate for their higher default risk.

Drivers of Securitisation in India:
A source of borrowing or funding for Originators:
Suppose a company has made so many loans that it is now unable to make further loans. As a result, the company sells its loan and receivables to another company and thus, receive cash flow that it can use to make more loans.
Redistribution of credit risk from Originator:
Credit risk is the risk of loss due to borrower’s failure to pay back a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. Thus by selling the loans and receivables to a third party, the originator is able to redistribute the risk from itself to the buyer.

Priority sector lending:
One of the major drivers of securitisation in India is PSL (Priority Sector Lending) targets of the banks. Banks are mandated by RBI to have minimum exposure in identified sectors like agriculture, MSME (micro small and medium enterprises), education, etc. The shortfall in PSL targets of banks is being met by purchasing portfolios from NBFCs.

Diversification of portfolio:
Securitisation is also used for diversification of the portfolio to manage credit exposures under various categories of assets. This helps in re-balancing and re-distributing various risks such as credit, market or liquidity risk or risk of concentrations on the balance sheet as the risks can be bundled or hived off and distributed between various assets as per their risk appetite.

Improving the liquidity position:
It provides alternate debt instruments by which funding can be arranged over and above the balance sheet. It frees up an originator’s capital by removing the assets from the balance sheet and improves the liquidity position as the future receivables are replaced by cash.

Stages of Securitisation:
In the first stage, the Financial Institutions (FI) or NBFCs, known as originator transfers the homogeneous pool of assets to the SPV. The originator receives the money on the same day when assets are sold to SPV.

In the second stage, the assets are converted into securities called Pass-Through Certificates (PTCs) by the SPV or Trustee and are then sold to third-party investors.

Various roles in the process of Securitisation:
Originator:
An originator is an entity that makes loans to the borrowers or having receivables from customers. It can be a bank, NBFCs, Housing Finance Companies (HFCs) etc. It is the entity which requires the financing and hence, drives the deal. Typically the originator owns the assets or receivables around which the transaction is structured.

Special Purpose Vehicle (SPV) :
It is an entity which buys the assets from the originators and packages them into securities for further sale. An SPV is typically used in a structured transaction for ensuring bankruptcy remoteness from the originator. The SPV is the issuer of securities. Usually, the ownership of the cash flows or assets around which the transaction is structured is transferred from the originator to the SPV at the time of execution of the transaction.

It may be a company, trust, or other entity constituted or established for a specific purpose – (a) activities of which are limited to those for accomplishing the purpose of the company, trust or other entity, as the case may be; and (b) which is structured in a manner intended to isolate the corporation, trust or entity from the credit risk of an originator.
Bankruptcy Remote means the unlikelihood of an entity being subjected to voluntary or involuntary bankruptcy proceedings.

Obligors:
The obligor is the originator’s debtor. The amount outstanding from the obligor is the assets that are transferred to the SPV. Debts and collateral of the obligor constitute the underlying assets of securitisation.

Credit Enhancer:
The role of a Credit Enhancer is to reduce the overall credit risk of securities issued by means of providing a buffer in the nature of over-collateralisation, cash collateral, and guarantee. It can be provided by the originator or any third party. Credit Enhancer comes into play in the event of obligor defaults on its payment obligations or the cash flow generated by the pool of assets is less than the amount that is contractually required due to the default of the underlying borrowers.

Credit Rating Agency:
The role of a credit rating agency is to provide value addition to the securities. The securities issued are assessed by a rating agency to allocate a rating. A wide range of investors requires a minimum rating of investment grade or higher. The rating agencies review the following factors—
Quality of the pool of the underlying assets in terms of repayment ability, expected defaults, recovery rates etc.

Abilities or strength of the Obligors to repay the loans.
Analysis of the legal risk.

Quality of credit support i.e. nature and level of creditability to manage the portfolio of assets.
Credit Enhancements.

Servicer:
The servicer performs the functions of collecting the cash flows, maintaining the assets, keeping records, and general monitoring of the obligors. The servicer collects the money from the pool of obligors and deposits the money in the Collection and Payout Account. The servicer also provides periodic information to the rating agency and the trustee regarding the behaviour of the obligors in terms of repayment of the loans extended to the obligors. Generally, the originator acts as a servicer.

Underwriting:
Underwriting means the arrangement under which a bank agrees, before issue, to buy a specified quantity of securities in a new issue on a given date and at a given price if no other purchaser has come forward.

Investor:
Investors are the entities to whom the securities are sold. Investors buy the securities issued by the SPV and are, therefore, entitled to receive the repayments and interests based on the cash flow generated by the underlying assets.
THE PROCESS OF SECURITISATION
The process of securitisation involves several steps that are described below:
The originator identifies the assets or pool of assets to be securitised.

The originator looks for an SPV to which it can sell the assets or a new SPV is formed.

The SPV buys the assets or loan receivables from the originator under certain agreements and transforms them into securities (PTCs)
The SPV collects the funds from the investors and in return issues securities to them. The SPV issues securities in tranches in order to attract an investor with the different risk-return profile. SPV pays the money to the originators on the same day.

A servicer is appointed. In the Indian context, the originator himself plays the role of the servicer.

The servicer then collects the money from the obligors and pays off the collection to the SPV by depositing in Collection and Payout account.

The SPV then passes the collection to the investors.

Investors receive both the principal and interest payments from the asset over the lifetime of the securities.

If there are a small number of outstanding receivables left to be collected by the originator, it may ‘clean up’ the transaction by buying back the outstanding receivables.

One important point here is to note that the amount collected by the servicer from the obligor, the amount is drawn from credit enhancement, the amount collected from the investors are deposited in an account, known as Collection and Payout account opened in a designated bank under the signature of the trustee.

FLOW CHART OF SECURITISATION
CREDIT ENHANCEMENT PROVIDER
OBLIGORS

INVESTORS
8.ISSUE OF PTC
5.CREDIT ENHANCEMENT
2. COLLECTION

1.ORIGINAL LOANS
V
10.SERVICING OF PTCs
9. CASH FLOWS

SPV

ORIGINATORS

7.PURCHASE CONSIDERATION

6.SUBSCRIPTION TO PTCs

RATING
AGENCIES

3. SALE OF ASSETS
4. RATING

BENEFITS OF SECURITISATION:
Securitisation can offer a number of advantages for the stakeholders. Securitisation benefits the economy as a whole by bringing financial markets and capital markets together. Securitisation connects the capital markets and financial markets by converting these financial assets into capital market commodities. The agency and intermediation costs are thereby reduced. Some of the benefits of the traditional securitisation are as follows:
Benefits to the originators:
Securitisation frees up an originator’s capital by removing the assets from the balance sheet and allows the originator to create assets and generate income, while simultaneously shifting the assets off its balance sheet through a sale to the Special Purpose Vehicle. Income from the assets is, therefore, accelerated even if the asset is not recorded on the balance sheet, leading to a lower capital requirement and improvement in both asset related and income related ratios. This way capital is now available for origination of fresh assets with profitability potential.

Through securitisation, an originator with a relatively lower credit rating but a relatively better-rated cash flow would be able to raise funds at a cheaper cost. If the originator does not have a good credit profile then it is really difficult for the company to borrow from the traditional sources.
Improves the liquidity position of the originator since future receivables are replaced by cash. Illiquid assets are converted into cash and thus provide an alternative source of funds.

An important tool for redistributing risks such as credit risk, market or liquidity risk, risk concentrations on the balance sheet of the Originator.

Benefits to the investors:
Provides another option for diversifying their debt portfolio.

Since the securities are divided into various tranches, it facilitates the participation of investors in the relatively lower or higher risk portion of the cash flows, as per their own taste and preference.

The presence of the Special Purpose Vehicle provides certain additional assurance and safety to the Investors.

High rated and credit enhanced securities add to the safety of investments as well as capital savings for the investors.

Allows flexibility in structuring the timing of cash flows to one’s need. The structures can be fully amortising structure, at par structure, at the premium structure, fixed or floating rate structure etc.

Benefits to the Servicers, Trustees, Credit Rating Agencies and Brokers:
Securitisation offers added business opportunities and increases the fee income for such parties.

Benefits to the Financial Markets:
Securitisation provides alternative debt instruments in the financial markets and improves market liquidity. It widens the market and allows the entry of new players. It enhances return on capital, diversifies financial markets and serves as an alternative route of funding. It diversifies credit markets as it breaks the process of lending and funding into several steps, leading to specialization and economies of scale. Securitisation improves efficiencies in financial markets through risk diversification as the risks can be bundled and hived off and distributed among counterparties better equipped to manage these risks.
RISKS INVOLVED IN SECURITISATION:
Investors face a very different set of risks from the one involved in traditional lending. Therefore the analysis of risks in Securitisation requires a separate framework, distinct from that of conventional lending. The key risks in typical Securitisations are listed below:
Credit Risk :
Credit risk may arise in transactions on non-payment by underlying borrowers in the pool of loans because of either inability or unwillingness to pay. Analysis of the underlying asset class, the robustness of the origination process, past performance of the originator, overall portfolio and pool characteristics will provide insights into the credit risk associated with the underlying borrowers. Credit Enhancement is provided to cover the shortfalls in pool collections, investor payouts due to default by the underlying borrowers.
Counterparty Risk :
Counterparty risk arises on account of non-performance of many counterparties (whose performance is crucial for the smooth functioning of the transaction) involved in the securitisation process. The key counterparties to be analysed are the servicer, the designated bank etc. Key counterparty risks to be factored in the securitisation are given below:
Servicer Risk :
The Servicer plays a crucial role in a securitisation process. The investors are exposed to the risk of bankruptcy and non-performance of the Servicer. The quality of the Servicer Management Team, the collection process, strategy and follow up mechanism adopted by the Servicer and the quality of the Management Information System (MIS) used by the Servicer needs to be evaluated to avoid or minimize the risk.

Commingling Risk :
In most securitisation transactions, there is a time lag between pool collection and investor payouts. Typically the Servicer collects the money from the underlying borrowers in the pool in a particular month and deposits the amount in the collection and payout account on the payout date. In the meantime, the money collected lies with the Servicer and may commingle with its own Cash Flows. In the event of the Servicer going bankrupt, there could be a total or partial loss or delayed recovery of the commingled amount due to legal proceedings.

Legal Risk :
The key legal issue in any securitisation transaction is ascertaining whether the transfer of receivables constitutes a ‘True Sale’, whereby the Originator can’t retain control over the receivables or any claim over receivables that could override the claim of the investors. Any dispute over the legal ownership of the assets is likely to result in uncertainty regarding investor payouts from the pool of cash flows.

Market Risk:
Market risks represent risks extraneous to the transaction and include market-related factors, which could have an impact on transaction performance. For instance, a change in the interest rates may impact prepayment rates for assets. The various segments of market risks are –
Macroeconomic Risk:
The performance of underlying loan contracts depends on macroeconomic factors such as industry downturns or adverse price movements of underlying assets. For instance, a sustained decline in industrial production may result in a slowdown in the transportation industry. This may cause a strain on the cash flows of the truck operators, which may in turn impact repayment of Commercial Vehicle (CV) loans.

Prepayment Risk:
A combination of prepayments and volatile interest rates represent a difficult situation for investors. Typically prepayment of retail loans increases with a reduction in interest rates leading to re-investment risk for investors. Investors may receive their money ahead of schedule and may not be able to re-invest this amount at same yield.

TREND IN SECURITISATION:
In the financial year 2017, securitisation transactions in India hit a lifetime high of almost Rs. 93000 Crore, recording a growth rate close to 43% as compared to the financial year 2016. The sharp rise in the volume was driven by changes in underlying market dynamics such as —
Clarity on the distribution tax, which meant PTCs were back in vogue, even as a volume in the Direct Assignment route continued to be robust.

Increased participation by the private sector banks and NBFCs.

The Excess Interest Spread (EIS) enjoyed by the NBFCs.

However certain barriers were also realised that prevented the growth such as-
Demonetisation, which halted deals as investors were worried about asset-quality, especially in microfinance.

Introduction of Priority Sector Lending Certificates (PSLCs), which rapidly gained traction and provided a direct substitute to Securitisation to meet PSL requirements. The ease of purchase and absence of risk transfer make PSLCs an attractive alternative to Securitisation for meeting Priority Sector Lending targets. Some of the notable originators in Indian Securitisation market are Choalmandalam investment and finance company limited, Sundaram finance group, Shriram transport finance company etc.

Data Analysis:
Data of the last 10-year Securitisation volume has been collected from ICRA, CRISIL and RBI website. Data regarding the composition of PTC and DA and monthly collection ratio have also been collected from CRISIL website. The Securitisation volume of Cholamandalam Company of the last 10 years has been collected from the company’s balance sheet.

The data was used to analyse the growth trends of the industry.

In figure 1, the last 10-year trend in Securitisation volume has been shown. There was a rising trend in the Securitisation volume, shown by the upward sloping green line.
PRE FY 2011: There has been a significant growth in issuance volume in the Financial Year (FY) 2008. During the FY 2008, the Indian domestic securitisation market remained quite insulated from the global credit environment. The reason behind it was a sudden increase in corporate loans which account for over half of the total volume. Following the guidelines on securitisation issued by RBI in 2006, various originators (NBFCs/banks) started preferring Direct Assignment of retail loans to investors rather than a transfer of receivables to SPV and issue of PTCs to multiple investors. The effects of a crisis that was faced by the world in FY 2008 were seen till FY 2011, where the volume of Securitisation decreased for consecutive 3 years as shown in figure 1.

POST-FY 2011: RBI has classified in the master circular in July’2011 that loans by
banks to NBFCs will no longer be considered as Priority Sector Lending. Post this change in regulation there was only one major way in which banks could meet their shortfall in PSL targets such as the acquisition of portfolios from NBFCs. On the other hand Originators’ motive in entering into these transactions was a capital relief; tenure matched funding, excess interest spread, transfer of risk, alternative source of raising funds etc. This led to a rise in transactions involving the bilateral assignment of the retail loan pool, mainly including loans to Small and Medium Enterprises (SMEs), Commercial Vehicle/Tractor loans, microcredit etc.

Changing Composition of Pass-Through Certificates (PTCs) and Direct Assignment: The scrapping of Dividend Distribution tax in the Union Budget of February 2016 provided a strong impetus to PTC Securitisation which galloped to almost 74% to a decadal high of Rs. 43800 Crore from Rs. 24900 Crore in Financial Year 2016.

In figure 2 and figure 3, the change in the volume of PTC transactions and Direct Assignment (DA) transactions for the time period 2013-2017 has been shown. The PTC volume has decreased up until FY 2015 and then onwards it has increased at a higher rate. On the contrary, DA volume has increased thoroughly over the mentioned time period.

Growth in PTC Securitisation was largely driven by private sector banks and to some extent some NBFCs who prefer it over alternative DA route because of higher regulatory due-diligence and also because of the absence of Credit Enhancement in DAs. Also, the removal of the dividend distribution tax meant yield on PTCs became more attractive. Consequently, the private sector banks went for PTC transaction to meet their PSL requirements.

Securitisation transactions through DA route remained healthy throughout the time period. It has grown to Rs. 48800 Crore in FY 2017 at a growth rate of 6.45 % as compared to FY 2016.

Asset Class-wise PTC and DA Transactions:
FIG 4: Asset Class-wise PTC and DA Transactions
-1325245-72390 -821055-80645 5080-57721500 8255-57658000 In figure 4, the asset class wise PTC transactions are shown for the financial years 2014 to 2017. We can see that the PTC transactions are majorly backed by Microfinance and Commercial Vehicle (CV) or Tractor loans. The Commercial Vehicle, Commercial Equipment (CE) and Tractor Loans constitute the bulk portion of the PTC transactions and it has continued to grow over the years. The long and relatively stable record of CV/CE lending in the country which is demonstrated through good performance of the past pools is one of the important reason for the popularity of this asset segment in PTC transactions.

FIG 5: Asset Class wise DA transactions
13335047625290512547625
On the other hand, the Direct Assignment of retail loans remains dominated by the MBS due to its superior asset quality. In figure 5 it has shown that MBS constitute the bulk portion of the DA Transactions in the financial year 2016 and 2017.

THE DEMONETISATION DRAG:
The Government of India announced the immediate withdrawal of existing high-value currency notes from November 8, 2016. This created disruption in the market for a few days in repayment for loans and collection by NBFCs. The announcement impacted the dynamics of the Securitisation industry temporarily.

In the Microfinance sector, where the transactions are predominantly in cash, collection efficiency fell sharply post Demonetisation and have improved partly till March 2017. The impact of Demonetisation on Vehicle Loans was limited to low collection efficiency in the first few weeks. NBFCs also slowed down disbursement as they coped with the evolving situation. They increased efforts towards collections by deploying more personnel in the field. The collections increased sequentially in subsequent months and disbursement normalised to pre Demonetisation levels by March 2017.

As a result, there were very few transactions in the quarter ending December 2016. The sudden fall in collections from the existing securitisation pools made certain classes of investors to remain cautious while other investors invested in new pools in the last quarter ending December 2016 due to improved collection efficiency in subsequent months and overall market revived.

In figure 6 Monthly Collection Ratios (MCR) have been plotted against months. There was a sharp decline in MCR to 91.8% in the month of November 2016 followed by Demonetisation. But the MCR had increased substantially in the next immediate month and thereafter had remained stable.

ROLE OF RBI IN REGULATION OF SECURITISATION:
The Reserve Bank of India is the regulator of the major players in the Indian financial system (banks/NBFCs/FIs) and has to ensure that financial intermediaries engage in Securitisation prudently. RBI issued the first set of comprehensive guidelines applicable to banks, financial institutions and NBFCs on Securitisation in India way back in February 2006. The guidelines covered the following aspects relating to Securitisation: Broad definitions on important Securitisation related concepts such as SPV, bankruptcy remote, credit enhancement, first loss facility, liquidity facilities, service provider and underwriting facilities.

Prescribed detailed true sale criteria and criteria to be met by originators and SPVs, i.e. originators should not indulge in market making on securities issued by SPV.
Detailed policy for originators and third parties on the provision of credit enhancements, underwriting facilities, servicing arrangements etc.

Credit enhancement cannot be withdrawn by the provider throughout the life of the transaction except to cover the losses suffered by SPV.

Based on the lessons learnt from the global financial crisis on Securitisation, RBI reviewed its guidelines and new guidelines were issued in May 2012. Certain imprudent practices had developed in Indian Securitisation market like origination of loans with the sole intention of immediate securitisation and securitisation of tranches of project loans even before the total disbursement was complete, thereby passing on the project implementation risk to investors. So the new guidelines captured these issues to protect the interest of the investors and originators. The important features of the May 2012 guidelines are as follows:
Prescription of Minimum Holding Period (MHP): MHP varies from 3 months to 12 months depending upon the tenor of the loan and repayment frequency and is defined in terms of a number of instalments paid. The criteria governing the determination of MHP reflect the need to ensure that i)the project implementation risk is not passed on to investors and ii) a minimum recovery performance is demonstrated prior to Securitisation.

Prescription of Minimum Retention Requirement (MRR): 5% for loans up to 24 months and 10% for loans of tenor beyond 24 months. The MRR is primarily designed to ensure that the originating banks have a continuing stake in the performance of securitised assets.

True sale criteria made applicable to assignment transactions also.

Stress testing requirements were laid for banks/FIs/NBFCs in respect of their Securitisation positions. The factors for stress tests could include a rise in default rates in the underlying portfolios in a situation of economic downturn, the rise in pre-payment rates due to falling in the rate of interest or rise in income levels of the borrowers leading to the early redemption of exposures.
Re-securitisation is not allowed
Credit enhancement is not allowed in case of assignment transactions—as the assignment deals are generally carried out among the two financial institutions. It is expected that the purchasing institution will do its own due diligence while acquiring assets rather than relying on credit enhancement.

In case of non-compliance with the guidelines, as applicable to the originators, no capital relief will be available for originators.

CONCLUSION:
Though significant progress has been made in reconfiguring Securitisation markets in the aftermath of the global financial crisis, the task of ensuring that these markets contribute to economic growth and financial stability is unfinished. In this context, we must note that the critics point the fingers at the regulatory framework itself. It is alleged that the regulations are conservative and inhibit the growth of the segment. The restrictions on assignments, the prohibition of re-securitisation, the restrictive first loss provisions, the restrictive credit enhancement provisions, stamp duty, foreclosure laws, the absence of standardised loan documentation are mentioned as impediments. Stamp duty is a state subject in India. High stamp duty on transfer of assets in Securitisation can often make a transaction unviable. This adversely affects the growth of the market.
However, in our opinion, the Indian Securitisation market is raring to grow. There are reasons for it-
Firstly, the priority sector obligations will continue to be a good reason for Securitisation. While the PSLC have affected the markets adversely, there is still need for diversification of portfolios and hence Securitisation will still have its place.

Secondly, the NBFCs, be they Asset Finance Companies specialising in SME financing or vehicle financing, or MFIs or Housing Finance Companies (HFC), their USP is their capacity to originate loans and advances in sectors where the mainstream banks have the least penetration. They have a comparative advantage and to leverage that they will have good opportunities in resorting to Securitisation.

Thirdly, the new set of differentiated banks, the Small Finance Banks, whose major portfolio will be small loans, will resort to Securitisation for diversifying their balance sheet.
Fourthly, given recent experience relating to the stress and non-performance of infrastructure finance and project finance, questions have been raised about the capacity of other than large banks in the credit appraisal of such large credits. This can compel these banks to participate in large infrastructure and project credits through Securitisation after the project has taken off, rather than participation through multiple banking arrangements before the cash flows have emanated.

Despite all these reasons, investor appetite is still low for junior tranches, carrying lower ratings—which are retained by the Originators. Investor awareness and understanding of securitisation is very low. RBI, key drivers of securitisation in India like ICICI and Citibank and rating agencies like CRISIL should actively educate investors about securitisation.

So, if all these problems are taken care of and with proper due diligence from the regulatory authority Reserve Bank of India, the Securitisation market is expected to grow in future.

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