Lenders will soon be able to securitize more of the debt on their books, including credit card receivables, student loans and payments due from exports, and list these on the country’s stock exchanges, effectively lowering their cost of doing business.
The Lok Sabha approved the Securities Contracts (Regulation) Amendment Bill, 2006, earlier this week and once the Rajya Sabha passes it, banks and other lenders can get more loans off their books than they are currently allowed to.
“It (legislative approval) is a very major step,” said S. Sridhar, chairman and managing director of National Housing Bank, India’s mortgages regulator.
Securitization helps a lender grow its business without seeking more capital. For example, a lender can bundle a pool of assets such as car loans and sell them to investors; the investors buy into the pool and their returns are in the form of payouts from repayments by the borrowers.
Securitization allows lenders to take loans off their books—since regulations mandate that lenders cover the risk associated with their loans with capital, this allows them to lend more without raising more capital.
The market for securitized debt is currently estimated at Rs70,000 crore, but existing rules do not allow companies to securitize things such as credit card receivables and student loans.
And even that debt which can be securitized isn’t allowed to be traded on stock exchanges now. The Rs70,000 crore market is largely composed of auto and personal loans.
Without taking into account the benefits of secondary market trading—once the security is listed on an exchange it can be traded, pretty much like a share—credit rating agency Crisil estimated that $6-6.5 billion (about Rs27,000 crore) of assets would be securitized in the current financial year.
At present, securitized assets cannot be listed on stock exchanges; institutions that buy them have to hold them till maturity. Most buyers prefer to invest in assets that mature in about two years, which generally rules out securitizing mortgage assets.
The value of mortgage assets on the books of companies in the business was Rs86,034 crore on 31 March 2006 (the most recent date for which this data is available).
The average maturity of mortgage-backed assets needs to be around 10 years, according to a banker who did not wish to be identified. The fact that current maturities are around two years limits the ability of mortgage firms to reduce their operating cost by securitizing assets.
India’s stock market regulator Sebi will notify the trading norms for such securitized assets once the legislation is in place.
“Overall, this will improve the way markets are managed, the way players are able to manage balance sheets. I think it is an encouraging step,” said Sanjay Aggarwal, national director, financial services, at audit firm KPMG. The risk needs to be transferred to investors to help the process, added Aggarwal.
Assets can be securitized in such a way that the original lender that is getting the loans off its books, retains most of the risk, or they can be securitized to transfer the risk to the investor. The extent of risk would reflect on the pricing of the security (or loan paper).
The legislation would encourage more people to look at securitized assets, said Koparkar Prasad, head, structured finance, Crisil. “People can look at getting into long-term papers because of liquidity. It would help mortgage-backed securities,” he added, referring to the fact that secondary market trading was now possible.
The legislative approval comes in the backdrop of the government’s attempt to open the market to pension funds. Analysts said secondary market listing would need the support of long-term investors such as pension funds and insurance companies.
Retail investors, however, are unlikely to be early participants in large numbers. Listing of securitized assets would give retail investors an extra investment option, but a lot of effort would be needed on the part of brokers and issuers to create awareness among them, said R. Swaminathan, national head of mutual funds & head of equities, at brokerage IDBI Capital Market Services Ltd.
The success of the secondary market trading in securitized assets is closely linked to overall popularity of debt market instruments, said a banker. The finance ministry has been examining ways to popularize debt trading in India.