The Reserve Bank of India’s new norms for securitisation would hit the volume of direct assignment transactions, shift the market to issuing pass through certificates (PTCs) and increase the cost of doing these deals, said bankers and analysts.
The norms curb credit enhancement for direct assignment. This would drastically reduce the volumes, said Ramraj Pai, director, ratings, at CRISIL. However, since these would only apply to new transactions, the capital adequacy impact should be only incremental.
Issuance in the Indian securitisation market rose in 2011-12 to Rs 36,600 crore from Rs 30,825 crore in 2010-11, according to Icra estimates. In 2010-11, volumes had dipped 29 per cent over 2009-10. They were hit after RBI proposed norms for a minimum holding and minimum retention period.
Direct assignment is a bilateral portfolio sale. There is no Special Purpose Vehicle as buyer. An operating entity like a bank or mutual fund buys assets. In securitisation, the SPV issues receipts or PTCs to investors.
An analyst with a rating agency said banks and non-banking finance companies (NBFCs) would still cut direct assignment deals, factoring defaults and pricing. For securitised paper, investors will be exposed to mark to market (MTM, revaluing assets at current values) risks.
Umesh Revankar, managing director of Shriram Transport Finance, said with new norms that curb direct assignment, the market will shift towards issuing PTCs. Also, the cost of doing transactions might go up. The high capital charge for bank that securitise loans and MTM provisions for those investing in paper will constrain growth of such transactions, says Icra.
Further, the unresolved issue of the income tax department’s claim of taxing the SPV involved in securitisation as a separate entity will also constrain growth.