Securitised issues touch $5.5 billion

International rating agency, Moody's Investors Service, said that contrary to the slowdown seen in 2006, securitisation issuances in the Indian market rose 90 per cent to $5.5 billion between January and June 2007 from $2.9 billion over the same period a year earlier.

In the first half of 2007, number of deals were 75 per cent of the total deals done on 2006.

"This vigour confirmed that the market has again acquired the fast pace observed since 2000," said Dominique Gribot-Carroz, assistant vice-president, Moody's in Hong Kong.

The growth was prompted by an over 90 per cent increase in issuance of asset-backed securities (ABS). ABS accounted for 64 per cent of the total issuance of structured financial transactions in the first six months of 2007.

ABS covers a variety of assets, including cars and utility vehicles, commercial vehicles, construction equipment, two-wheelers and personal loans.

"With the retail lending business in India likely to grow, although possibly at a slower rate, we expect ABS issuance to increase in the second half of 2007," said Gribot-Carroz.

He added, "Banks, especially those active in the retail finance business, are likely to face capital constraints."

Issuance volume was also propped up by the securitisation of single corporate loans, which accounted for 29 per cent of issuance till June 2007.

Only three retail mortgage-backed securities transactions closed between January and June 2007 and accounted for 7 per cent of issuance.

The long-tenure of such papers together with the lack of secondary market liquidity deterred certain investors despite the huge potential in securitising home loans given the significant expansion in the underlying housing finance business, said the Moody's report. The potential launch of real estate mutual funds (REMFs) could facilitate institutionalisation of the real estate sector and encourage RMBS issuance.

In 2006, consequent to the securitisation guidelines issued by the RBI, the securitisation activity had slowed with players preferring to directly acquire the loan portfolio with the credit enhancement level decided bilaterally. The direct assignment of loan pools to investors as against the transfer of the receivables to a Special Purpose Vehicle (SPV), and issuance of pass through certificates (PTCs) to multiple investors is not covered by the guidelines.

Tight liquidity and a rise in interest rates in 2006 also contributed to the slowdown in issuance which flattened to around $6 billion for 2006.

The continued rise in interest rates in early 2007 could have slowed down securitisation issuance, but issuance stayed robust due to growth in the underlying credit markets, said the report.

The average issuance per transaction amounted to $43 million in June-January 2007 , similar to the previous year.

While the ABS volumes were expected to grow in the second half of the year, given capital constraints on banks and loan growth, regulatory measures, such as recognition of PTCs as securities and permission for government pension and provident funds to invest in securitised paper could further boost the securitisation market, said the report.