Moves Afoot To Securitise Priority-Sector Lendings
Talks are on for the securitisation of priority sector lending advances once the rules and regulations are in place. In a closed-door meeting of representatives from the regulator (National Housing Bank), originators (housing finance companies) and investors (banks) last week, bankers also deliberated on the advantages of securitising non-performing assets (NPAs) considering that asset reconstruction funds have not made much progress.
The purpose of the meeting, organised by Darashaw Broking and Investment Banking Company, was to bring together the three concerned parties in order to create greater awareness in the market and exchange views on the impediments and legal aspects.
A leading public sector bank present at the deliberations, however, felt that the current form of inter-bank participatory certificates (IBPCs) changing hands between public sector banks with surplus priority sector advances and foreign banks or private sector banks falling short of meeting the Reserve Bank of India's (RBI) 40 per cent stipulations, is preferred by the banking industry.
The RBI has allowed public sector banks (PSBs) with surplus priority sector lending advances to temporarily deduct them from their balance sheet for a period of 90 to 180 days, through the issue of IBPC. The private or foreign bank picking up these certificates onto its books would offer the public sector bank funds to the extent of the amount of advances at less than the market rate of interest for the agreed period of the transfer of assets.
"Since the borrowers have an account with the PSB, which also has a charge on the loan, the assets would be transferred back to the bank post-March 31," a senior official from a PSB said.
Banks falling short of the stipulated priority sector lending norms opt for these certificates over investment in Sidbi or Nabard since the interest offered by these institutions is less than the bank's cost of funds.
It is unlikely that advances under priority sector lending would be securitised as "priority sector lending is available only in the first case of financing, and the special purpose vehicle (SPV) may not have recourse to that", said the senior official.
On the issue of securitising NPAs which otherwise would be either provided for or written off, banks would sell these loans to the SPV, which would appoint a servicing agent specialising in recovery of bad loans. Securitisation of NPAs has been successful overseas, said Sandeep Bhattacharya, a senior dealer with Darashaw Broking and Investment Banking Company, citing the example of Japan, the US, Korea and Italy.
On the investment front, even as there is appetite and demand among banks to invest in securitised paper, many are asking for "a premium for ignorance of the guidelines", Bhattacharya said.
Some of the pending issues relate to accounting standards and how investment will be treated in terms of capital adequacy. The Securitisation Bill is currently pending to be passed in Parliament.