Securitization

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Table of contents
1. Definition of Securitiztion
2. Indian Regulatory framework for
Securitization
3. Securitization: The Indian sceanario
4. Present Scenario of the Indian
Securitization Market
5. Future Outlook
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What is Securitization?
Securitization refers to the process of pooling and
selling existing assets in the books of a
lender/creditor(The Originator) to a Special
Purpose Vehicle(SPV) and repackaging them into
tradable ,asset-backed securities(ABS).The essential
features of securitization are :1)the sale proceeds are available to the Originator
of the transaction(i.e. the seller) immediately;
2)the assets are taken off the Originators books
and are not available to the Originators creditors in
the event of his bankruptcy;
3)can have higher credit ratings than the
Originators , depending on the quality of assets
securitized and credit enhancements made
available
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Indian Regulatory
Framework for
Securitisation

The Securitization and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002
By the late 1990s, a rising level of bank N.P.As motivated committees
like the Narasimham Committee II and Andhyarujina Committee, which
were constituted for examining banking sector reforms, to seek changes
in the legal system to address the issue of N.P.As.
The SARFAESI Act empowers Banks / Financial Institutions to recover
their Non-Performing Assets without the intervention of the Court. It was
passed in 2002 to legalize securitisation and reconstruction of financial
assets and enforce security interest. The Act envisaged the formation of
Asset Reconstruction Companies (A.R.Cs) and securitisation Companies
(S.Cs).
The main provisions of this Act includeregistration and regulation of securitisation companies or
reconstruction companies by the R.B.I,
facilitate securitisation of financial assets of banks,
empower S.Cs/A.R.Cs to raise funds by issuing security receipts to
qualified institutional buyers (QIBs),
empowering banks and FIs to take possession of securities given for
financial assistance and sell or lease the same to take over

THE SARFAESI ACT, 2002

The Act provides three alternative methods for
recovery of N.P.As, namely:

Securitisation: means issuing securities by

raising of receipts or funds by S.Cs/A.R.Cs,
from Qualified Institutional Buyers by forming
schemes for acquiring financial assets. The
S.C/A.R.C shall maintain separate accounts for
each such scheme for every financial asset
acquired, out of investments made by a QIB
and ensure that realizations of such financial
assets are applied towards redemption of
investments and payment of returns assured
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on such investments under the relevant

The SARFAESI ACT, 2002

Exemption from Registration of Security Receipt: The Act also
provides, notwithstanding anything contained in the Registration Act,
1908, for enforcement of security without Court intervention:
(a)any security receipt issued by the S.C or A.R.C, as the case may be,
under section 7 of the Act, and not creating, declaring, assigning,
limiting or extinguishing any right, title or interest to or in immovable
property except in so far as it entitles the holder of the security receipt
to an undivided interest afforded by a registered instrument; or
(b)any transfer of security receipts, shall not require compulsory
registration.
The Guidelines for S.Cs/A.R.Cs registered with the R.B.I are:
Act as an agent for any bank or FI for the purpose of recovering their
dues from the borrower on payment of such fees or charges
Act as a manager between the parties, without raising a financial
liability for itself;
Act as receiver if appointed by any court or tribunal.
Apart from above functions any S.C/A.R.C cannot commence or carryout7

THE SECURITIZATION COMPANIES AND

RECONSTRUCTION COMPANIES (RESERVE
BANK) GUIDELINES AND DIRECTIONS, 2003
The R.B.I issued guidelines and directions relating to registration, measures of
A.R.Cs, functions of the company, prudential norms, acquisition of financial assets
and related matters under the powers conferred by the SARFAESI Act, 2002.
Defining N.P.As: Non-Performing Asset (N.P.A) means an asset for which:
Interest or principal (or installment) is overdue for a period of 180 days or more
from the date of acquisition or the due date as per contract between the borrower
and the originator, whichever is later;
Interest or principal (or installment) is overdue for a period of 180 days or more
from the date fixed for receipt thereof in the plan formulated for realization of the
assets.
Interest or principal (or installment) is overdue on expiry of the planning period,
where no plan is formulated for realization of the any other receivable, if it is
overdue for a period of 180 days or more in the books of the S.C or A.R.C.
It is provided that the Board of Directors of a S.C or A.R.C may, on default by the
borrower, classify an asset as a N.P.A even earlier than the period mentioned above.
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THE RECOMMENDATIONS OF THE HIGH

LEVEL COMMITTEE ON CORPORATE DEBT
AND SECURITIZATION, 2005
The recommendations of the High Level Committee on Corporate Debt
and Securitisation (Chairman: Dr.R.H.Patil) in 2005 proved to be one of
the turning point towards the development of the corporate debt and
securitisation market. Some of the key recommendations included:
Evolve a consensus on the affordable rates and levels of stamp duty
on debt assignment, Pass through Certificates (PTCs) and security
receipts (SRs) across States.
An explicit tax pass-through treatment to securitisation SPVs / Trust
SPVs should be provided. Wholesale investors should be permitted to
invest in and hold units of a close-ended passively managed mutual
fund whose sole objective is to invest its funds in securitised paper.
Large-sized NBFCs and non-NBFCs corporate bodies established in
India may be permitted to invest in SRs as Qualified Institutional Buyers.
Private equity funds registered with SEBI as venture capital funds (VCFs)
may also be permitted to invest in SRs within the limits that are applied
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for investment by VCFs into corporate bonds

R.B.I GUIDELINES FOR

SECURITISATION OF STANDARD
In February 2006,ASSETS
the RBI issued (FEB
guidelines2006)
for securitisation of

standard assets by Banks, FIs and NBFCs. These guidelines provided the
regulatory framework for several critical aspects of securitisation and
are expected to establish a more robust structured credit market. The
guidelines were broadly as follows:
Detailed guidelines to ensure arms length relationship between the
originator and the SPV, i.e. they are independent of each other.
Credit enhancements provided by the originator for the first as well as
second losses to be deducted from the capital.
Any profit/premium arising on account of sale not allowed to be
booked upfront and is to be amortised over the life of the securities
issued or to be issued by the SPV
Disclosure by the originator, as notes to accounts, a comparative
position for two years of the following items: 1) the total number and
book value of loan assets securitised; 2) sale consideration received for
the securitised assets and gain/loss on sale on account of securitisation;
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3) form and quantum (outstanding value) of services provided by way of

R.B.I GUIDELINES FOR

SECURITISATION OF STANDARD
ASSETS (FEB 2006)

Though some concerns have been raised regarding these guidelines as

being restrictive, RBI is very clearly treading a cautious step adopting
an officially termed incentive-compatible prudential approach towards
securitisation - an approach defensible in the aftermath of the recent
sub-prime episode in some developed countries.
In 2007, the Securities Contracts (Regulation) Amendment Act 2007
amended the Securities Contract (Regulation) Act to include securitised
instruments in the definition of securities. The amendment has
paved way for listing and trading of securitised debt on stock
exchanges.

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GUIDELINES ON SECURITISATION AND

DIRECT ASSIGNMENT TRANSACTIONS
(MAY 2012)
The RBI, in May 2012, put out the final guidelines on securitisation and
direct assignment of assets by banks.

This is the first time the RBI has issued separate guidelines for Direct
Assignment transactions. Amongst the important new prescription in the
guidelines is the prohibition of credit enhancement for direct
assignment transactions. The other key stipulations are a Minimum
Holding Period (MHP) for Originators before off-loading the receivables
and a Minimum Retention Requirement (MRR) through the tenure of the
transaction.
The guidelines are expected to have far-reaching implications on the
issuance volumes as well as the nature of the transaction structures
adopted.

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Latest policy advocacy by

RBI
1. Specifically, the measure are a new tax
regime that will lift post-tax investment
returns from securitization trusts
2. Changes in regard to foreign portfolio
investors (FPIs) that will encourage
foreign investment and changes to deal
structures
3. New bankruptcy code that will reinforce
creditors' rights.
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SECURITISATION: THE INDIAN

SCENARIO

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Present Features of Securitisation

in India
Key Originators segment
N.B.F.Cs
Key Investor segment
Banks
Typically AAA ratings targeted, though wider ratings
spread over past 2 years.
Tenure
MBS: door-to-door 12 to 20 years (Average 6 to 8 years)
ABS: door-to-door 40 to 60 months (Average 18 to 24
months)
Investor Yield
ABS fixed yield

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SECURITIZATION IN INDIA (20002006)

The volume of issuances of securitised transactions grew exponentially
beginning in 2000 due to rapid growth of consumer finance. There were
approximately 75 issuances each year after 2000 till 2006.
Securitisation of rated transactions increased from less than Rs.1,000crore in
1998, to over Rs.30,000 crore in 2004 05.
Number of originators was less than 5 in 2000, and rose to more than 20 in
2005.The top five originators accounted for 90% of the issuance volume in
2004-05.
Investors acceptance of securitized instruments also gradually improved,
due to passing of SARFAESI Act in 2002.There was pressure on the resources
of large originators due to continued growth in consumer credit. The growth
of debt funds, the largest investors in securitized paper, also supported the
expansion of the securitisation market .
ABS accounted for over two-thirds of issuances of all securitised issuances
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Impact of February 2006 R.B.I

Guidelines
Scenario before Feb
2006 Guidelines

Scenario after Feb

2006 Guidelines

Securitisation
transactions dominant
(over 80% in FY06)

Surge in Direct
Assignment transactions
(75% in FY12)

ABS is the key product,

and ABS issuance is
dominated by banks .

Securitisation by banks
gradually reduced - no
bank-originated
transactions in last 2
years , although they
are the key investor
segment.
Surge in ABS as well as
RMBS transactions, and

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Present Scenario of the

Indian Securitization Market

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Trend in securitization Issuances (including rated bilateral assignments) by

value, in Rs. Crore
Source: ICRAs estimates
FY 12

FY 13

Amoun Share Amoun

t
t

FY 14

Share Amoun
t

FY 15

Share Amoun
t

FY 16

Share Amoun
t

Share

ABS

27,344 72%

27,230 90%

23,504 82%

16,330 95%

24,686 99%

RMBS

7,680

20%

3,025

10%

5,296

18%

840

5%

270

1%

Total
35,02
Retail
4
Securitizat
ion

92%

30,25
5

100
%

28,80
0

100
%

17,17
0

100
%

24,95
6

100
%

LSO

2,217

6%

Others

635

2%

Overall
total

37,87
6

100
%

30,25
5

100
%

28,80
0

100
%

17,17
0

100
%

24,95
6

100
%

Growth

19%

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(20%)

(5%)

(40%
)

45%

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Trend in Securitization

Source: ICRA Rating Feature

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Growth of Direct Assignment

Transactions

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Source: ICRA Rating

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Future Outlook
The way the securitization / D.A. market
evolves in FY2017 will depend on factors
like the ability of the banks to meet PSL
targets on their own or through some
alternate channels (including PSLCs),
renewed or fresh interest in securitization
given clarification in taxation related
issues, interest from public sector banks in
acquiring retail assets and the pace of
growth in the loan books of the key
Originators.
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