Securitised debt paper issues decline as home loan rate rises

Rising interest rates on home loans will see a fall in the issuance of securitised debt paper, popularly known as mortgage-back securities (MBS).

In the first nine months of calendar year 2004, banks and housing finance companies issued Rs 10,000 crore worth of securitised paper. A large portion of this was against home loans.

Securitisation essentially converts cash flows associated with illiquid assets, in this case home loans, into marketable securities.

"As interest rates on floating home loans have risen, we do not expect more issuances of MBS in the short-term," said Sudhir N Variyar, director business development, Fitch. Until floating interest rates get further corrected ensuring a spread, banks will not issue further MBS, he added.

Today when MBS are sold at a yield of about 7.5 per cent, and floating rate loans are also offered at the same interest rate, there is no spread for banks, making MBS unprofitable.

However, with no rise in interest rates on auto loans and personal loans, banks are expected to continue issuing securitised paper against these loans.

"We expect a small breather in the issuance of securitised paper due to the rising interest rates. However, with retail lending activity continuing to be the focus area of most banks, securitisation as a product class will continue to see healthy growth rates," said Variyar.

Securitisation has seen volumes double year-on-year. In fiscal year 2002-03, issuers securitised assets worth Rs 5,000 crore, which doubled to Rs 10,000 crore last year, and is expected to increase to Rs 20,000 crore by the end of 2005.

At the same time, Fitch anticipates that in 2005-06, the strategy to sell down assets and take them off the balance sheets not to be as strong, largely due to the rising interest rates.

The entry of public sector banks as originators of securitised paper would however, change the dynamics and push growth. Today PSU banks are not issuers of paper in the market and there are only a handful of investors.

Majority of the paper issued today is by private sector banks, which also double up as investors in buying this paper along with the rising demand from mutual fund houses.