The Reserve Bank of India is planning to ask banks to set aside more capital to back sales of securitised products like pooled loans and credit card receivables. The change in guidelines will increase transparency in the fledgling, but important, segment of the debt market and give investors more confidence to buy them. The joint plan being worked on by the finance ministry and RBI will mandate banks to set aside a specific risk-capital charge for securitisation. The draft guidelines are expected by the end of this month. Confirming the development, RBI deputy governor Usha Thorat said on Tuesday at a banking summit: Additional guidance on securitisation focusing on a minimum lock-in period and minimum retention criteria for securitising loans originated and purchased by banks is proposed to be issued shortly. An official familiar with the developments said the draft would also specify a separate lock-in period for different products being securitised based on their tenor. Besides, banks will also have to disclose the sponsorship of off-balance sheet vehicles used to securitise financial assets. Banks will also be mandated to disclose the securitisation exposure on their trading books as well as the sponsorship of their off-balance sheet exposures, the official said. Securitisation is a process through which a bank or financial institution creates a new financial product by combining receivables such as home loans, project receivables or even credit card payments. The repackaged instruments are then sold to investors. Done well, the process imparts liquidity and diffuses risk in the financial system and can develop as an alternative to the over dependence on equities in the Indian capital market. But an overdose is, for instance, at the root of the current global financial crisis. In India, securitisation is largely based on a trust structure wherein underlying financial assets such as loans are transferred to a trustee company or a special purpose vehicle. That entity in turn issues pass-through certificates to investors who can trade in those papers. In its annual monetary policy for 2009-10, RBI said some banks securitised loans immediately after originating or purchasing them from other banks. Banks are also dividing the total loan for one project into different tranches and securitising a few tranches even before the total disbursement is complete, thus passing on the project implementation risk also to the investors, RBI said, while ordering a review of the securitisation framework. The lock-in period being proposed would ensure that banks or financial institutions actually hold on to underlying assets for some time, thus taking on the risk instead of trying to offload it immediately. RBI will therefore suggest a longer lock-in period for long-tenor assets being securitised such as home loans. It s the right decision. You know the risks sitting on the balance sheets should be known to all stakeholders, Indian Banks Association chairman and Union Bank of India (UNIONBANK.NS : 226.75 +3.75
) CMD MV Nair told FE. Experts acknowledge that this market has been affected by the global subprime crisis. The small size of the Indian debt market has also been compounded by shrinking trade volumes and numbers. Yet, securitisation in India holds great potential as an alternative financing option and could be a driver of economic growth.
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