Welcome thoughts on securitisation from RBI–economic times

Clipped from: https://economictimes.indiatimes.com

The draft framework for the securitisation of standard bank assets put out by the Reserve Bank of India (RBI) seeks to rationalise a market with huge potential. It could increase liquidity for banks. Securitisation converts illiquid loans on the lenders’ books into tradable securities. It involves pooling of loans, and selling them to a special purpose vehicle (SPV) that, in turn, issues securities termed pass-through certificates (PTCs) backed by the loan pool.

Back in 2006, when RBI issued its initial norms, securitisation volumes amounted to only about Rs 23,500 crore; the figure had grown to over Rs 2,65,000 crore in 2019. However, much of what is labelled securitisation here is actually not quite that, and RBI seeks to remedy this in its latest guidelines. Note that both direct assignment (DA, or customised transactions) and PTCs are deemed to be securitisation transactions. The draft norms now propose that only PTC route be considered genuine securitisation. That makes perfect sense. Under DA bilateral transactions, the originator and investor engage in extensive discussions, no doubt, but it rules out arm’s-length capital pools like mutual funds, insurance and pension funds from participating and gainfully providing long-term funds. The DA route has been the dominant model of securitisation, and clearly needs reform.

To make PTC the preferred choice for securitised transactions, an RBI expert committee last year called for setting up an intermediary for market-making and standard-setting. We also need to develop standards for loan origination, documentation and standardised formats for data aggregation. Listing needs to be mandatory for all debt issuances above a certain threshold. Sound securitisation would lead to an active corporate bond market.

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