Securitization Market in India

Securitization issuance in emerging markets

Country Issuance in $bn Asia
Taiwan South Korea India Singapore Malaysia Indonesia Japan 1.9 26 6.67 1.2 0.4 0.6 81 Brazil Mexico Argentina Chile Peru Columbia Others

Country

Issuance in $bn Country

Issuance in $bn EEMEA

Latin America
4.8 4.3 1.5 0.9 0.7 0.5 1.3 Turkey

4.5 2.2 1.7 0 0.2

South Africa Egypt Russia Others

Asia

117.77

Latin America

14

EEMEA

8.6

Emerging markets total $ 53 bn in 2005.

Securitization issuance in emerging markets

Securitization issuance in emerging markets
30 25 20 15 10 5 0

Billion $

Country

The three stages of securitization in India

The early years The growth phase The new era

Securitization in India: Landmarks

First auto loan securitization First MBS RBI issues First partial guarantee First multi- guidelines on (PG) rated structure asset CDO securitization

1992

2000

2001

2002

2004

2006

First securitization including property receivables

The early years

First offshore transaction backed by aircraft purchase receivables The Growth Phase

First revolving securitization involving working capital facilities The new era

The three stages of securitization in India

Securitization began with the sale of consumer loan pools. Originators directly sold loans to buyers. Originators acted as servicers and collected installmenst due on the loans. Creation of transferable securities backed by pool receivables (known as PTCs) became common in late 1990s.

The three stages of securitization in India

In 1990s, there were only six or seven issuances per year. Average issue size was about Rs.450 million. The volume of issuances grew exponentially beginning in 2000 due to rapid growth of consumer finance. Investors acceptance improved. of securitized instruments also

The three stages of securitization in India

There were approximately 75 issuances each year. Average issue size was about Rs.1900 million. There was pressure on the resources of large originators due to continued growth in consumer credit. From 2004 to 2005, 40% of vehicle finance was funded through ABS backed by auto loans.

The three stages of securitization in India

The growth of debt funds, the largest investors in securitized paper, also supported the expansion of the market . Citibank completed India's first revolving securitisation issuance for its small and medium enterprises working capital loans in 2004. The fixed rate issuance of Rs 50 crore comprised two series of pass through certificates with bullet maturity of two years. Strong performance and higher yields also attracted investors.

Growth of Indian Securitization Market

Growth of Indian SF market
375 300 225 150 75 0 2002
Values Source: ICRA rating Feature 25 90 75 127 150 120 90 60 30 0

2003

2004

2005

Number of Deals

The Indian Securitization Market

Securitization market volumes
350 300 250 200 150 100 50 0
Collateralized Loan Obligations Mortgage Backed Securities Asset Backed Securities

Source CRISIL

Product Wise Growth Pattern of Indian Securitization Market

250 200 150 100 50 0 2002 ABS
Source: ICRA report

2003 MBS

2004 CDO PG

2005 Others

2006

Milestones in the growth of Securitization market in India

The first deal in India was in 1992 when Citibank securitized auto loans and placed a paper with GIC mutual fund worth about Rs. 16 Crores. In 1994-95, SBI Caps structured an innovative deal where a pool of future cash flows of high value customers of RSIDC were securitized. ICICI had securitized assets to the tune of Rs.2,750 crore in its books as at end March 1999. Another novel move was by Maharashtra government to securitize sales tax. The Maharashtra Vikrikar Rokhe Pradhikaran (MVRP) is the SPV to undertake this first of its kind transaction in the country.

Milestones in the growth of Securitization market in India

Securitization of rated transactions increased from less than Rs.1,000crore in 1998, to over Rs.30,000 crore in 2004 05. (Rs.1 crore = Rs.10 million). An oil monetization deal has been structured where the future flows of oil receivables accruing to a company were securitized.

Milestones in the growth of Securitization market in India

L&T has securitized lease receivables even before a power plant was completed. This has opened a new vista for financing power projects. This securitization deal financed even the assets to be created in future. The National Housing Bank (NHB) has made efforts to structure the pilot issue of mortgage backed securities (MBS).

Characteristics of Securitization market in India

High concentration of originators. Number of originators was less than 5 in 2000, and has become more than 20 in 2005. The top five originators account for 90% of the issuance volume. Banks have not yet adopted securitization because of regulatory concerns.

Characteristics of Securitization market in India

Preference for highest rated tranches. Focus is on the short end of the maturity. Investors appetite is restricted to senior tranches that carry the highest ratings AAA / P1+. Originators retain the junior tranches as unrated paper.

Characteristics of Securitization market in India

Bond like characteristics of PTCs. PTCs are structured to have a predetermined schedule of monthly interest and principal payments to be paid on timely basis. The structure in international market is different where interest is paid on a timely basis and principal is repaid according to instrument maturity.

Characteristics of Securitization market in India

High level of credit enhancement compared to international norms. Enhancement in the form of overcollateral, etc. cover credit losses. Timing mismatches due to delayed collection are also covered. Bond-like outflows coupled with volatile inflows require high enhancement levels.

Characteristics of Securitization market in India

Domination of ABS. Securitization has a 100% compounded annual growth rate, of which ABS accounts for over two-thirds of issuances. The growth of MBS was hindered by the low investor appetite for longer tenor assets. CDOs have also not taken off as they are unattractive to the originators due to high level of credit enhancement needed.

Past Trends in Indian Securitization market

Routing the transaction through an SPV yet to gain popularity. Absence of active secondary market for securitized debt. The market was till recently unregulated. Lacked transparency in volume, price, parties to the transaction, etc.

Past Trends in Indian Securitization market

Most deals in the past involved:
The transfer of beneficial interest on the asset and not the legal title. The pass-through mechanism. An escrow mechanism for payment to the buyer. Direct purchases of receivables by financial institutions, and bigger NBFCs.

Opportunities in Indian securitization market

RBI guidelines on securitization of standard assets have encouraged originators to look at potential cost effective solutions for structuring the securitization transactions. The third party participation in the transaction is also encouraged. The concept of mezzanine debt, and repackaged PTCs which are already prevalent in global structured finance market can be adopted in India now.

ABS: Distribution by Asset Class

ABS : Distribution by asset class

Cars Construction equipments Utility Vehicle Others Two wheelers Personal loan

Growth of the Indian ABS Market

250 200 150 100 50 0 2002 2003 2004 2005 Average deal size 10 8 6 4 2 0

Value

Prepayment trends in ABS in India

Prepayment rates vary significantly across asset classes as the highest is in personal loans (PL), and lowest is commercial vehicles (CVs). Established prepayment trends are changing for e.g. prepayment rates in CV pools are increasing though it still remains the lowest whereas prepayment rates in most other asset classes are declining. Repossession driven prepayment are increasing in importance like in CVs. Prepayment effects pool duration, especially in PL pools.

Mortgage Backed Securitization in India

MBS has potential for high growth as: There is significant expansion in housing finance. The largest ever transaction of MBS in India was Rs.12 billion mortgage backed pool of ICICI Bank.

Credit Enhancement
Credit enhancement utilization Minimum Maximum Median 0.58% 2.01% 0.85%

Barring two transactions, the utilisation has been within 10% of the available level.

Hurdles in the growth of MBS in India

Long tenure of MBS paper together with the lack of secondary market liquidity. Unlike retail vehicle loans, home loans in India either get repriced or prepaid, which exposes the structure to significant prepayment / interest rate risk, thus leading to requirement of higher credit enhancement. The presence of fixed rate PTCs backed by virtually floating rate loans is another hurdle.

Growth of MBS Market in I ndia

40
16

30

12

20
4

10

0 2002
Value

2003

2004

2005
Number of Transactions

Classification or Tranches
Tr anche Senior Subordinated Mezzanine Equity notes Cr edit r ating

Mezzanine PTCs in the I ndian market

Mezzanine debt can be applied to any securitization transaction including ABS, MBS, and CDOs. Retail ABS can be a preferred option due to less volatile and more predictable performance. CDOs are also a gainful option because the underlying default statistics used for structuring CDOs are highly robust and reliable.

Scope of Mezzanine Tranching

Capital Str uctur e of Tr aditional I ndian Secur itization tr ust
Senior PTC Total Total Capitalization Capitalization 100% 100% Mezzanine PTCs Equity Equity

Capital Str uctur e of secur itization tr ust with mezzanine tr ust

Senior PTC

I mpact of introduction of Mezzanine PTCs in the I ndian market

The Mezzanine PTCs will address the capital pressure originators face, which will help revitalize the market. The public sector banks, which account for three-fourth of the assets of the banking sector, are likely to adopt securitization. In case of upgrades of mezzanine tranches, the investor stands to gain both in terms of capital provision as well as mark to market gains / realized capital gains.

The repackaged PTCs

Tranching post repack

Originally stipulated second loss Originally stipulated first loss

Senior repackaged PTCs Mezzanine tranche = now required second loss Equity= now required first loss

Pr e r epack

Post r epack

The repackaged PTCs

The process of repackaging results in:
New set of investors providing the credit enhancement; hence no lowering of credit support to the investors in underlying transactions as the overall credit enhancement remains same. Reduced originator involvement as part of his original investments are being divested. Enhanced third party participation with aligned risk and return.

ABS Sectors in the USA

500 400 300 200 100 0

Sectors $bn
Home equity Student loan
Source the Bond market association

Credit card Other

Auto Private ABS

I ssuance of mortgage backed securities in US

2500.0 2000.0 1500.0 1000.0 500.0 0.0
1990 1993 1996 1999 2002 2005

Agency backed
Source: US Federal agencies

CMO

Private labled

RBI Guidelines on Securitization

New guidelines announced by RBI in February 2006.
True sales requirement, and capital requirement for credit enhancement have become more stringent. The new regulation encourages third party participation in the transactions. Third party enhancement providers now receive preferential treatment over originators providing the same service. The profit arising from sale of assets is to amortized over the life of instrument.

Regulatory environment in I ndia for securitization

Settlement procedures were not well defined before the new RBI guidelines issued in February 2006. Lack of accounting and valuation norms (Guidance Note now issued by ICAI) Only a few states have relaxed stamp duty levy. Taxation issues are yet to be resolved.