Mumbai: The recent move by capital market regulator Securities and Exchange Board of India (Sebi) to allow the listing of securitized debt is likely to revive the market for such instruments, which suffered in the wake of the 2008-09 slump.
The move will bring in a new set of investors and give cash-strapped non-banking financial companies (NBFCs) access to the capital market, experts said.
Sebi allowed the listing of securitized debt and published disclosure norms for issuers on its website on 17 March. In India, the annual issuance of such instruments is pegged at Rs40,000-50,000 crore. This is expected to rise as NBFCs start listing debt, experts said.
Popular debt instruments such as pass-through certificates (PTCs) are issued by banks and NBFCs. When these lenders reach their finance limit, they often sell their loan books to an entity, usually known as a special purpose vehicle (SPV), which in turn issues paper bearing a certain coupon, based on the nature of the underlying loan.
“We primarily sell priority sector loans to banks that are bilateral in nature,”said R. Sridhar, managing director, Shriram Transport Finance Co. Ltd, an NBFC. “However, listing PTCs may give us a different set of investors and we are evaluating the economics of it.”
As NBFC businesses grow, the need for alternate sources of funding will increase and such listings will rise,said Pawan Agrawal, director, Crisil Ltd.
“NBFCs will also need to balance the listing benefits with the additional disclosure requirements,” he said, adding that 75-80% of such securitized debt issuances is in the form of bilateral assignments. “About 75% of these instruments originate from commercial vehicles, 20% from cars and 5% from mortgages.”
Credit card debt may also form part of these originating loans.
Institutions such as mutual funds allocate investments under liquid, money market and short-term funds to PTCs.
After the 2008-09 crisis, Indian asset managers, who used to allocate 10-15% of their debt-oriented investments to such paper, brought it down to 1-2%.
“Listing will improve liquidity. PTCs offer 100-150 basis points higher returns than certificates of deposit and commercial paper, but they are also riskier,” said the chief marketing officer at a large domestic mutual fund on condition of anonymity.
Detailed information about securitized debt instruments, the assets and loans on which these instruments are issued, their originators, their strength and the risks involved in such issuances are available with credit rating agencies. That’s because issuers often seek credit ratings for such paper before selling it in the market.
The issues constraining the growth of the securitization market include limited investor demand for longer tenures, especially given the low secondary market liquidity, said Kalpesh Gada, head, structured finance, at ratings agency Icra Ltd. Besides this, there are the final Reserve Bank of India guidelines on the minimum holding period and minimum retention requirement, which also affect issuance volumes.
Apart from this, banks prefer loan book growth rather than investing in instruments, which explains the large share of bilateral assignments in the asset- and mortgage-backed securities market, Gada said.
“From the investor’s point of view, tenure, pricing, and credit risk would be important. However, overall, credit rating would be a key comfort factor,” he said.
These instruments are mostly sold to institutional investors, but following Sebi’s new guidelines, issuers will be able to float public issues and sell them to a wider clientele, since there will be better transparency, better price discovery, better liquidity and better public disclosure as per these fresh norms. The new prospective customers include foreign institutional investors (FIIs) and retail investors.
“It may be of interest, although many institutional investors are still considering whether to take up the risk as they lost a lot of money in 2008. Supervisors have also become a lot stricter,”said Roderick Munsters, CEO of Netherlands-based global asset manager, Robeco Group. “Intrinsically, it’s of interest not just internationally, but also for India, because this makes it possible to redistribute debt and to price it properly. In the long run, it will be of interest to international investors also.”
The move will take forward the stated agenda of regulators to deepen and widen the debt market, which is dominated by government paper.
“The listing of these instruments will increase the liquidity and ability to trade in such instruments,” said Agrawal of Crisil. “It will likely introduce a wider set of investors, potentially including FIIs.”
However, given the complex nature of securitized debt, retail investors are unlikely to be too eager to opt for such paper, both Icra and Crisil said.
“These are complex instruments meant ideally for institutional investors,” said Gada of Icra. “I think retail investors investing in fixed-income instruments would typically prefer simple instruments with predictable cashflows.”