Card Receivables Latest In Securitisation

After securitisation of home loans and auto loans, it's now turn of the credit cards receivables to be securitised. For the first time in the country, Standard Chartered Bank (StanChart) is set to securitising a part of its credit card receivables.

Securitisation of credit card receivables is a popular concept in the US and in the western markets.

"We are in the process of securitising our credit card receivables. There are two ways to do it... We are yet to decide whether there will be any recourse back to the bank or whether it will be without recourse," Standard Chartered Bank's chief executive officer, India Region, Jaspal Bindra, said.

 

StanChart has issued more than 13 lakh cards in the country. The average card spend in the country is estimated at Rs 19,000 per annum. The securitisation of card receivables is part of the bank's plan to securitise both its retail and corporate portfolio. In the retail portfolio, it is also looking at securitising its home loan portfolio.

"Credit card securitisation is a very popular product in the West and is perceived to be better than auto loans securitisation due to the large base of customers which reduces the potential of defaults. In credit cards, the risk is timely payment by the customers," says a senior foreign bank official.

Adds Sudhir Joshi, country head-treasury, HDFC Bank, "The rating agency will have to over-collateralise the tranche. The coupon rate will depend on the structure and the bank will have to put in some sugar-coating to attract investors. There are big spreads for banks which are securitising their receivables."

Domestic banks typically charge in the range of 2.5-3 per cent per month on outstanding credit. The major feature of credit card securitisation is the short cycle of the receivable - as it is paid within 4-5 months. Therefore, the usual amortization structures used for auto loans etc cannot be used for credit cards. If the collections from the customers are passed directly to the investors, the investors would get paid off within 4-6 months which is not cost-efficient.

To circumvent this problem in the West, a unique structure is used to give security a longer life span than the average repayment period of a credit card receivable which involves splitting of the receivables into finance charges and principal.

Bankers pointed out that to achieve a better rating, credit enhancement is needed to insulate investors from fluctuating payment patterns and cardholder charge-offs. The common forms of credit enhancement are excess spread, a cash collateral account, a collateral invested amount and subordination.