8/14/2019 Structured Financing in India -by Santosh Parashar

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8/14/2019 Structured Financing in India -by Santosh Parashar

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Risk Transfers

o Insurance risk

o Weather risk

o Credit risk

Participants/Players involved in a SecuritisationPrimarily there are three parties to a securitisationtransaction:

The Originator: This is the entity on whose books

the assets to be securitised exist and is the primemover of the deal. The entity designs the necessarystructures to execute the deal. In a true sale of theassets, the Originator transfers both the legal andthe beneficial interest in the assets to the SPV.

The SPV: This entity is the issuer of the

bond/security paper and is typically a low-capitalisedentity with narrowly defined purposes and activities.It usually has independent trustees / directors. TheSPV buys the assets to be securitised from theOriginator, holds the assets in its books and makesupfront payment to the Originator.

The Investors: The investors could be either

individuals or institutions like financial institutions(FIs), mutual funds, pension funds, insurancecompanies, etc. The investors buy a participatinginterest in the total pool of assets and receive theirpayments in the form of interest and principal as per

an agreed pattern.

Apart from these three primary players, others involved ina securitisation transaction include:

The Obligor(s): The obligor is the Originators

debtor or the borrower of the original loan. Thecredit standing of the Obligor is very important in a

securitisation transaction, as the amountoutstanding from the Obligor is the asset that istransferred to the SPV.

The Rating Agency: The rating process assesses

the strength of the cash flows and the mechanismdesigned to ensure full and timely payment. In thisregard the rating agency plays an important role asit assesses the process of selection of loans ofappropriate credit quality, the extent of credit andliquidity support provided and the strength of thelegal framework.

Administrator or Servicer: Also called as the

receiving and paying agent, it collects the paymentdue from the Obligor(s) and passes it to the SPV. Italso follows up with delinquent borrowers andpursues legal remedies available against defaultingborrowers.

Agent and Trustee: It oversees that all the parties

involved in the securitisation transaction perform inaccordance with the securitisation trust agreement.Its principal role is to look after the interests of theinvestors.

External Credit Enhancer: Underwriters some

resort to external credit enhancements to imp

the credit profile of the instruments. Therevarious types of external credit enhancements as surety bonds, third-party guarantees, lettecredit (LC) etc.

Structurer: Normally, an investment banker is responfor bringing together the Originator, credit enhancer,investors and other partners to a securitisation dealalso helps in structuring the deals along with the Origina

Process of Securitisation The segmentation of roledifferent parties to the securitisation deal helps in builspecialisation and introducing efficiencies. The eprocess is broken into distinct parts with different paconcentrating on origination of loans, raising funds fromcapital markets, servicing of loans, etc.The figure g

below shows a simple securitization process.

Advantages of securitization:

1. The receivables are moved off-balance sheet andreplaced by cash equivalents.

2. The originators does not have to wait until it receivepayment of the receivables to obtain funds to continits business and generate new receivables.

3. The securities issued in the securitization are morehighly rated by participating rating agencies, thusreducing the cost of funds to the originators comparto traditional forms financing.

4. In non-revolving structure and those with fixed interate receivables, assets and related liabilities can bematched, eliminating the need for hedging.

5. Since the originator usually acts as servicer, there is

normally no need to give notice to the persons withwhom it does business.

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Current Scenario

In the recent months, securitisation deals have come down dramatically, given the regulatory uncertainty surroundisuch products. Low appetite, among prospective buyers in the aftermath of credit crisis, has also played a spoiler. Ear

this year, a loan advanced to pharma major Wockhardt changed hands a number of times in the course of a few dayWith Wockhardt defaulting on its obligations, most of these PTCs became worthless. RBI hopes that a minimuseasoning period will reduce the incidence of such reckless securitisation. This would mean that the security remains a banks balance sheet for a reasonable period would boost sentiment for the market.

The Reserve Bank of India, in its credit policy announced on 27th Oct 2009 has put up two requirements for securitisat a minimum 10% originator retention, and a minimum seasoning of 12 months. Obviously, the RBI is meaning to overly stringent when it comes to securitisation. In the wake of the subprime crisis, at some forums, RBI officials secomplimented saying that India had not suffered due to securitisation as RBI was sufficiently prudent. The fact, actually,that if we are crawling, you cannot feel happy at the fact that the other guy who was riding a horse fell.

Even while international regulators are imposing a minimum of 5% risk retention for securitisation the RBI just doubthat number. Of course, it is not clear from the credit policy whether the 10% slice is a vertical slice or horizontally lowslice. If it is vertical slice, it would make no difference at all, and in fact, would defeat the very purpose of laying down ri

retention. If it is lower horizontal 10%, it would be one of the most impractical stipulations to lay down, as, if there is 10risk of losses in a pool of assets, then the very idea of securitisation, nay, the very idea of banking, should fail. Banglobally require 4% Tier 1 capital, and 8% total capital, with the understanding that it is unlikely that unexpected portfolosses should exceed 8% of assets. Note that capital requirements are only for unexpected losses as expected losses aanyway taken care of by credit spreads. If originators were to keep a 10% first loss piece in a pool, they are keeping morisk to themselves than there, whereas a securitisation should result into at least some extreme loss risk.There is simno basis to explain that number 10%. It is clearly the product of over-enthused regulation, unmindful of the Concepteconomic capital.

What makes the 10% risk stipulation acute is that this is over and above the excess spreads, which are usually anywretained in securitisation pools. The excess spreads should logically take care of expected losses. If unexpected lossexceed 10%, there is no point in bankers creating loan pools, not to speak of securitizing theEqually illogical is the minimum seasoning requirements.

Though the fine print of the RBI stipulation is yet to come, one would not be surprised, if the guidelines remain limited securitisation and not a transfer of a loan. Past guidelines have made a stupid reference to securitisation meaningtransfer of financial assets to SPVs, thereby excluding from its scope such transactions as do not involve SP

In short, the RBI move will simply kill the securitisation market in India.

Some examples of securitisation in the Indian context are:

First securitisation deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160 mn

L&T raised Rs 4,090 mn through the securitisation of future lease rentals to raise capital for its power plant in 1999

Indias first securitisation of personal loan by Citibank in 1999 for Rs 2,841 mn.

Indias first mortgage backed securities issue (MBS) of Rs 597 mn by NHB and HDFC in 2001.

Securitisation of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through offshore SPV.

Indias first sales tax deferrals securitisation by Govt of Maharashtra in 2001 for Rs 1,500 mn.

Indias first deal in the power sector by Karnataka Electricity Board for receivables worth Rs 1,940 mn and placed

them with HUDCO.

Indias first Collateralised Debt Obligation (CDO) deal by ICICI bank in 2002

Indias first floating rate securitisation issuance by Citigroup of Rs 2,810 mn in 2003. The fixed rate auto loan

receivables of Citibank and Citicorp Finance India included in the securitisation

Indias first securitisation of sovereign lease receivables by Indian Railway Finance Corporation (IRFC) of Rs 1,960

mn in 2005. The receivables consist of lease amounts payable by the ministry of railways to IRFC

Indias largest securitisation deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan

receivables.

Reference Sources: 1.The Economic Times 22 oct 2009

2. www.vinodkothari.com3. http://www.bseindia.com/downloads/Securitisation.pdf

4.http://www.legalserviceindia.com5. Book: Clifford Gomez;Financial Markets,Institutions and Financial Services

http://www.vinodkothari.com/http://www.bseindia.com/downloads/Securitisation.pdfhttp://www.vinodkothari.com/http://www.bseindia.com/downloads/Securitisation.pdf