Securitisation mkt comes to a halt

The securitisation market in India has come to a virtual standstill after the credit crisis roiled markets across the globe and spurred a selloff in stocks and bonds. The stalling of these transactions may force banks and other lenders to hunt for additional capital to expand lending.

The securitisation market in India has taken a hit after mutual funds, the biggest investors in papers, were flooded with redemptions, forcing fund managers to sell liquid papers to repay investors.

Securitised papers are mostly illiquid as they are rarely traded in the secondary market. Mutual funds, through their debt and liquid funds, had invested about 10-15 per cent of their assets in securitised papers, said a fund manager. “Preference for such papers will be the least now,” said Ram Kumar, head, fixed income, Sundaram BNP.

Additionally, corporates, which are among the biggest investors in debt and liquid funds, haven’t returned with cash as they are using it to fund their working capital requirements and other immediate expenses.

Investors in October have redeemed from mutual funds a net Rs 46,793 crore, an astounding figure in a month since the Association of Mutual Funds in India started publishing data.

Securitisation of loans jumped by 72 per cent to Rs 36,150 crore as of September 2008, compared with Rs 20,850 crore in the same period a year earlier, according to credit rating agency Icra data.

Comparatively, securitisation deals have almost dried up in October and November so far with only stray transactions being concluded. “Issuances have almost stopped. Earlier, in a month we used to see six to seven asset-backed securitisation deals, but now it has dropped to just one,” said Raman Oberoi, senior director, Crisil Rating.

Securitisation involves pooling and repackaging of cash flow from assets into securities, which are then sold to investors. The principal and interest on the debt underlying the security are paid to the investors on a regular basis. Debts backed by mortgages are known as mortgage-backed securities, while those backed by other types of loans are known as asset-backed securities.

The stalling of securitised transactions has hit some non-banking finance companies (NBFCs) hard. Cholamandalam DBS Finance, a Chennai-based NBFC, had its short-term debt downgraded by Crisil because of heightened business risk profile and a slowdown in disbursement amid tight liquidity conditions.

The rating agency, amongst a host of other concerns, referred to the slowdown in the securitisation market, which may also limit Chola DBS’ ability to fund future growth. Chola DBS had securitised more than 25 per cent of its assets under management as on September 30, Crisil said.