SCRA amendment to allow banks to trade in ABS

The interest rates are expected to come down in the coming months after government allows banks to securitise all type of loans, list them on the bourses and sell them to investors at competitive rates.

Government is firming up a legislation that proposes to treat asset-backed securities (ABS), including non-performing assets of banks, financial institutions and non-banking finance companies, at par with any other securities -- equities or debt.

"Amendment to Securities Contract Regulations Act (SCRA) is required for securitised assets to be treated as any other securities, and become tradeable on stock exchanges," a senior finance ministry official said.

Although banks are securitising NPAs and selling them to asset reconstruction companies, finance ministry wants to allow banks to securitise performing assets like home loans, auto loans and other standard loans as well to raise funds.

Accordingly, the RBI recently came up with a draft guideline on securitisation of standard assets of banks.

The RBI stated that banks could securitise assets by bunching loan accounts and transferring it to a special purpose vehicle (SPV). The SPV would repackage the loans and sell assets to investors in the form of pass through certificates.

The need to amend SCRA has been felt as mere securitisation of NPAs or good assets is unlikely to fetch banks better value unless they could be freely traded on bourses like equities and bonds.

Since SCRA does not have any provision for treating PTCs as "securities", they cannot be traded on bourses, the official said.

An empowered expert committee was also proposed for developing a comprehensive framework for securitisation.

Banking sources said the amendment to SCRA to allow trade in securitised assets will provide a great relief to banks in terms of reducing the burden of NPAs, now at over Rs 65,000 crore, while countering the upward pressure on interest rates and the need for raising funds for meeting the basel-ii norms.

Once SCRA is amended, banks can raise more funds by securitising NPAs, housing loans and other loans and selling them to potential investors at attractive rates.

This will enable banks to raise funds at a lower cost and bring down the interest rates on loans.

The move will also improve financial health of banks as the entire securitised NPAs go out of their balance sheet.

According to Raman Uberoi, Director of Crisil, the recognition of PTCs as securities under SCRA is a crucial first step towards listing and trading of securitised debt, given that stock exchanges typically list only securities.

Listing of securitised debt is expected to facilitate trading and boosting secondary market liquidity.

Globally, securitisation markets have grown on the back of robust legal, tax and regulatory frameworks. The Indian markets have not, so far, had the benefit of such legislation, Raman said.