Pt.

Jawaharlal Nehru Institute Of Business Management

Vikram University, Ujjain

Subject:-

Management of Financial Services & International Finance

A Study of Debt Securitization in Indian Financial Services Sector

Topic:Submitted to Dr. D. D. Bedia Prepared by Pooja Shah Sheetal Rahurikar Shruti Pandya M.B.A III SEM.

INTRODUCTION
Recent years have witnessed the wide spread of Western financial innovations into developing markets. Globalization and integration of capital markets, started in the 1990s, have made it possible for such big global players as India to adopt new financial strategies which allow increasing liquidity and accelerating development of the capital markets. One of these financial innovations is securitization, the process of transformation of illiquid assets into a security which can be traded in the capital markets. Although the state of securitization in India is far from that of the USA and the UK, the market for securitized assets grows at a fascinating pace. This work attempts to analyze the origination, development and current condition of securitization in India. Securitization is the process of pooling and packaging Financial Assets, usually relatively illiquid, into liquid marketable securities. Securitization constitutes a key segment of structured finance. It is a technique by which identified receivables and other financial assets can be packaged into transferable securities and sold to investors. With the help of securitization transaction, an originator can transfer the credit and other risks associated with the pool of assets securitized. Securitization can provide much needed liquidity to an Originators balance sheet; help the originator churn its portfolio and make room for fresh asset creation; obtain better pricing than through a debt-financing route; and help the originator in proactively managing its asset portfolio. Securitization allows investors to improve their yields while keeping intact or even improving the quality of investment.

Borrowers (obligators)

Receivables Loan

Originator (bank/FI)

Cash
Liquidity Support

Sell Receivable
Credit Enhancemen t

SPV
Cash Securities

Investors
Fig. : Basic Model of Securitization

SECURITIZATION PROCESS

Liquidity Support

Investors SPV

Credit Enhancemen t

Essential features of a securitization transaction comprise the following: 1. Creation of asset pool and its sale The originator/seller (of assets) creates a pool of assets and executes a legal true sale of the same to a special purpose vehicle (SPV). An SPV in such cases is either a trust or a company, as may be appropriate under applicable law, setup to carry out a restricted set of activities, management of which would usually rest with an independent board of directors. 2. Issuance of the securitized paper This activity is usually performed by the SPV. Design of the instrument however would be based on the nature of interest that investors would have on the asset pool. In the case of pass-through issuances, the investors will have a direct ownership interest in the underlying assets, while pay-throughs are debt issued by the SPV secured by the assets and their cash flows. 3. Credit Risk It must be made abundantly clear at the very outset that the accretions on the asset-backed security, i.e., interest, amortization and redemption payments, are entirely dependent on the performance of the pooled assets, and will have nothing to do with the credit of the originator. By the same argument, such cash flows would also be not influenced by events affecting the condition of the originator, including insolvency. 4. Pool Selection The process of selecting assets to build a securitization pool would take into careful consideration, loan characteristics that are important from a cash flow, legal, and credit points of view, such as type of asset, minimum and maximum loan size, vintage, rate, maturity and concentration limits (geographic, single-borrower, etc.). 'Cherry-picking' to include only the highest quality assets in the pool should be consciously avoided. Ideal selection would be a random choice among assets conforming only to cash flow or legal criteria. Often, substitution of eligible assets in the place of original assets that mature/prepay in order to maintain the level of asset cover would also be required. 5. Administration Formal delineation of duties and responsibilities relating to administration of securitized assets, including payment servicing and managing relationship with the final obligors must be spelt out clearly through a contractual agreement with the entity that would perform those functions. In addition, the following features are often included as part of a securitization transaction: Credit enhancement to support timely payments of interest and principal and to handle delinquencies, Independent credit rating of the securitized paper from a well known credit rating agency, and, Providing liquidity support to investors, such as appointment of market makers.

SECURITIZATION IN INDIA

In India it got a start through ICICI's Receivable by the Citibank in February 1991,then the hire purchase portfolio of TELCO was securitized by the Citibank, the retail residential receivable of DLF international were also securitized by the Citibank in June 1992 .The Citibank has pioneered this trend in India. Now the HDFC came in the lead and started its operation through Housing loan portfolio around 50 crores. Infrastructure Leasing and Financial Services has entered into this field by setting up a SPV. If securitization has become popular in India, the commercial banks can remove the non-performing assets from the balance sheet and they can recycle funds which increase their profitability as well as they become able to meet their capital adequacy requirement. To analyze the potential of securitization India, we split the securitization market into the following four broad areas: Asset Backed Securities (ABS) Asset backed Securities are the most general class of securitization transactions. The asset in question could vary from Auto Loan/Lease/Hire Purchase, Credit Card, Consumer Loan, student loan, healthcare receivables and ticket receivables to even future asset receivables. In the Indian context, there has been moderate amount of activity on the Auto Loan securitization front. Companies like TELCO, Ashok Leyland Finance, Kotak Mahindra and Magma Leasing have been securitizing their portfolio of auto loans to buyers like ICICI and Citibank over the past 2-3 years, with several of the recent transactions rated by rating agencies like CRISIL and ICRA. While many of the deals are bilateral portfolio buyouts, ICICI has used the SPV structure * and placed the issuance privately to corporate investors and banks. One of the first publicized structured finance transactions in India was the Rs. 4.09 billion non convertible debenture program by India Infrastructure Developers Ltd (IIDL), an SPV set up for building and operating a 90 MW captive co-generation power plant for IPCL (March, 1999). IIDL raised finances on the BOLT (Build Operate Lease Transfer) model on the strength of its future cash flows from IPCL and limited support from L&T. The transaction was rated AA- (SO) by CRISIL. ICICI has done several bilateral asset backed securitization deals including securitizing DOT (Department of Telegraph) receivables from Sterlite Industries and Usha Beltron. Mortgage Backed Securities (MBS, RMBS, CMBS) As we discussed above, MBS constitutes about 76% of the securitized debt market in the US. In contrast, the MBS market in India is nascent - National Housing Bank (NHB), in partnership with HDFC and LIC Housing Finance, issued Indias first MBS issuance in August 2000. The potential of MBS in India, however, is huge. With NHB actively looking towards the development of a Secondary Mortgage Market (SMM) in the country [2], the MBS market in India could soon overtake the other securitization transactions in the country. An MBS market can help small HFCs with good origination capabilities and limited balance sheet strength in staying profitable and concentrate on the housing loan

origination. The most important roadblocks for MBS in India are lack of mortgage foreclosure norms and the high incidence of stamp duty for assignment of mortgage necessary for securitization. Collateralized Debt Obligations (CDO, CLO, CBO) In this era of bank consolidations, CDOs can help banks to proactively manage their portfolio. CDOs can also help banks in restructuring their stressed assets. ICICI made an aborted attempt to do a CBO issuance in August 2000. The CDO market in India is, however, likely to grow slowly owing to its complexities. The taxation and accounting treatment for CDOs needs to be clarified. Asset Backed Commercial Paper (ABCP) Asset Backed Commercial Paper (ABCP) is usually issued by Special Purpose Entities (ABCP Conduits) set up and administered by banks to raise cheaper finances for their clients. ABCP conduits are usually ongoing concerns with new CP issuances taking out the previous ones. Apart from legal requirements, an active ABCP market requires a large number of investors who understand the instrument and have appetite. Indias securitization market may not be mature currently for instruments like ABCPs.
Trends in Structured Finance Volumes (Rs. billion) 2001- 2002- 2003- 2004- 2005- 2006- 200702 03 04 05 06 07 08 12.9 36.4 80.9 222.9 178.5 234.2 313.2 0.8 14.8 29.6 33.4 50.1 16.1 5.9 200809 135.8 32.9 200910 209.7 62.5

Type ABS MBS

CDO/LSO/SL SD

19.1 24.3 28.3 25.8 21 119 318.2 364.4 145.8 OTHERS 4 2.3 0.5 26 13 11.6 7.9 TOTAL 36.8 77.8 139.3 308.1 249.6 369.3 650.3 544.7 425.9 (CDO: Corporate Debt Obligations, LSO: Loan Sell off, SLSO: Single Loan Sell-down) Source: Various Rating agencies like ICRA, CRISIL etc.

REASONS OF ITS UNPOPULARITY IN INDIA

As because of lack of awareness of this concept it has not gained much of the market. It involves heavy stamp duty and registration fees, which discourage to go in for this innovative technique of financing. The transfer procedure is also very complicated as well as cumbersome. The transfer of property calls for the transfer of property act and the irony is that the act does not entail any clause regarding the procedure of securitization. Again the lack of standardized procedure makes the working of SPV very difficult. Securitization without credit rating is not trustworthy but the difficult thing is that in India there is shortage of such agencies to take up the stupendous task of credit rating in of securitization purpose; Moreover all the working of this procedure requires active involvement of trust so that the fair accounting procedure must be adopted. The removal of asset is simple but How should one account of it is a challenge. It can be termed as a challenge before the accounting professionals to evolve suitable accounting procedure for securitization. The absence of proper guidelines by the regulatory authorities makes its usage unpopular.

LEGAL ISSUES
There are a number of legal factors which may concern Indian authorities with respect to securitization. First of them is a stamp duty. Under the statutory legislation, securitization involves transfer of mortgaged debt. This procedure should be done by means of a special instrument which involves paying ad valorem stamp duty. This stamp duty can reach as much as 8 per cent of the value of the transaction which turns out to be a burdensome payment for participants in the securitization market. Second, any transfer of property requires compulsory registration. This procedure makes securitization deals even more expensive. Third, the existing foreclosure laws impede development of securitization since they make it difficult to transfer property rights in the case of default. This situation does not encourage improvement of secondary trading in securitization instruments. However, some great strides have been made recently in order to better securitization legislation. The adoption of Ordinance allowed dealing with three largely unrelated aspects of securitization: securitization and securitization companies; asset reconstruction and asset reconstruction companies; and enforcement of security interests. The Ordinance clarified the ambiguity which existed with regard to permissibility of assignment of future cash flows from receivables by including such receivables to the group of financial assets. The law, however, evoked a mixed reaction among market participants. For instance, addressing several issues in one Ordinance may make certain provisions not entirely applicable in the context of securitization. Some ambiguous aspects need clarification as well.

INDIA SECURITIZATION SUMMIT (AUGUST - 2010)

NISM hosted the India Securitization Summit 2010 in Mumbai on August 10, 2010. It was supported by IDBI Bank, CARE, I-Peritus and Lewtan Technologies. About 150 delegates from the Indian securitization industry attended. It was a half-a-day event. The summit was inaugurated by Smt. Shyamala Gopinath, Deputy Governor, Reserve bank of India. She spoke about the complexity which prevailed in the international markets and the repair work undertaken globally. She dwelt on Indian Securitization markets, the growth of auto loans, reasons for slow growth of MBS and the reasons for direct assignments and securitization, the recent trends in the Indian Securitization Markets and the draft guidelines issued by RBI. She said there is need for dissemination of pool level information and ongoing performance details and that sustainable securitization could play a useful role in India. Mr. Prashant Saran, Whole-Time Member, SEBI delivered the key note address. He spoke about the problems with structuring of products, wrong incentive to underwriters, shortage of loan origination leading to slow growth in securitization market, and the need for better quantitative and credit policies along with high liquidity programs. He mentioned that it would be more prudent to work with structures that have less leverage, high quality of underlying assets and better liquidity to improve the securitization market. He too suggested that loan level Credit quality/Performance data should be made available in an easy manner.

THE INDIA SECURITIZATION SUMMIT (JULY 2009)

The India Securitization Summit 2009 was held on the 8th of July 2009 in Mumbai. Securitization continues to remain an attractive alternative source of capital, which could infuse liquidity and boost economic growth in India. The Indian Securitization markets, in recent times, have seen a slowdown result of lack of appetite in securitized instruments globally due to the sub-prime crisis and the stringent regulations in India. To ensure the securitization market becomes vibrant, there is a need for stimulus as well as supervision. Stimulus to make the securitized assets attractive, expand the asset classes which could be securitized and increase the scope of investor profile for this financial instrument. Supervision to ensure, excesses are prevented and investor capital is protected.

INDIAN SECURITIZATION MARKETS

Indian retail asset securitization market declined to Rs.193.1 bn in FY09, as against Rs.300 bn in FY08, at the same time the single loan collateralized loan obligation (CLO) market grew from around Rs.280 bn in FY08 to around Rs.310 bn in FY09 (refer Chart 1). The single loan CLO transaction involves a bank giving a loan to a corporate, the receivables from which are assigned to an SPV/trust and then sold to investors in the form of PTC. There were relatively few transactions in the first three quarters of FY09 with more than 50% of the total ABS/MBS volume taking place in last quarter. The unfolding of credit crisis in USA and European markets and the resulting liquidity crunch made investors cautious. This caution was further heightened by rising delinquencies in retail asset finance market. However, the performance of securitized pools in India continues to be strong with no defaults reported till date. Unlike developed countries where Mortgage Backed securities (MBS) are more prevalent, it is the Asset Backed securities (ABS) which have been the main driver of Securitization market in India. The market for MBS has been comparatively subdued with lack of investors interest in long term paper and high interest rate risk prevalent in the paper. FY09 also witnessed introduction of new asset classes, like gold loans, microfinance loans and loan against property, in the securitization market. The microfinance loans are categorized as loans to weaker sections under priority sector lending norms which enhance the attractiveness of this asset class. In the past few years there has also been a sharp increase in single loan CLO market with the underlying being a single corporate loan (typically a well rated corporate). In fact in the last couple of years single loan CLO market was larger than ABS / MBS market, with mutual funds being the single largest investor class in the segment. Indian retail asset securitization market volumes grew by 38.7% to Rs. 267.8 bn in FY10. In FY09 volumes had declined due to global credit crisis and the resulting liquidity crunch in Indian market. With global recovery backed by stimulus packages and improvement in credit flow in the financial market, the securitization activity gained momentum in FY10. The retail asset finance growth and demand for priority sector loans further propelled the growth of retail asset securitization market in India. ABS continues to be attractive in contrast to lackluster demand for MBS Asset Backed Securities (ABS) volumes crossed Rs. 200 bn in FY10 growing at about 50% y-o-y. Mortgage Backed Securities (MBS), on the other hand, grew by just 6%, direct fallout of lower demand for long term papers and other inherent limitations of MBS. The sole originator of MBS transactions in FY10 was HDFC Ltd. STRUCTURED FINANCE Direct Assignment preferred route for transfer Most of the transactions in ABS and MBS were through direct assignment route about 77%, being bilateral in nature between Originator as Assignor and Investor as Assignee. Majority of the direct assignment transactions involved pool of loans qualifying as advances to priority sector. Unlike Pass through Certificate (PTC) route, the direct assignment route facilitates the transfer of pool of loans qualifying as advances to priority sector directly from the Originators loan book to the Investors loan book instead of investment book. Banks fulfill their priority sector lending norms stipulated by Reserve Bank of India (RBI) by directly acquiring the pool of

priority sector loans from Non Banking Finance Companies (NBFCs) / Housing Finance Companies (HFCs) through this route. NBFCs - major Originators and Banks - major Investors It gives a distinct advantage to NBFCs in rural asset finance market. Rise in disbursements in FY10 coupled with classification of eligible loans as advances to priority sector have made securitization a preferred tool, for NBFCs, to source funds. In retail asset securitization volumes, NBFCs (including NBFCs registered as Microfinance Institution) share rose to 78.6% in FY10 compared to 66.5% in FY09 while Housing Finance Companys (HFC) share fell to 18.2% in FY10 compared to 22.8% in FY09. Among Other Originators, MFIs (also registered as NBFC) made their presence felt with securitization of pools worth more than Rs. 580 Cr in FY10 compared to only Rs. 148 Cr in FY09. Banks continue to be major investors in securitization transactions, primarily driven by its need to meet priority sector loan requirements. Public Sector Banks have emerged as one of prominent investor segment in FY10. Win-Win situation: NBFC as Originators, Banks as Investors Rising disbursements as a result of deeper penetration in rural and semi-urban areas makes available a huge stock of loans meeting priority sector lending requirements. Huge appetite for priority sector loans to meet regulatory requirement. Better funding rate (where pool comprises priority sector loans). Better investment yield compared to yield from NABARD bonds or other available investment avenues to compensate the shortage in priority sector lending target. Alternate source of funding. Good performance of pools with added comfort from Credit Enhancement. CV loans Major asset class Commercial Vehicle (CV) loans worth Rs. 146.7 bn were securitized in FY10, a growth of 72% over FY09. Used CV formed 46% of the total CV loans securitized. CV loans remain most preferred asset class for securitization as many of these loans are extended to Small Road & Transport Operators (SRTO) which qualifies as advances to priority sector. Further the priority sector lending requirement gave fresh impetus to volumes in tractor loan, gold loan and microfinance (Mf) loan securitization in FY10 registering a growth of 141%, 270% and 293% respectively. Car loan and Construction Equipment (CE) loan securitization grew 29% and 25%, respectively in FY10. Source: CARE Ratings estimates Update on Regulations RBIs Draft Guidelines issued in April 2010 stipulating Minimum Retention Requirement (MRR) and Minimum Holding Period (MHP) for securitization transactions. The draft guidelines intends to curb originate to distribute model and align the interest of originator and investor. Key features of the guidelines are enumerated below:

1) Stipulation of MHP and MRR Type of Loan MHP MRR Loans with original maturity of 24 months or less 9 months 5% of the book value Loans with original maturity of more than 24 months12 months 10% of the book value For a typical retail asset securitization transaction through PTC route, involving loans with more than 24 months original tenure, the MHP of the loans is proposed to be 12 months from the date of disbursement or date of first installment whichever is later and MRR is proposed to be 10% of the book value of the loans being securitized minimum 5% in equity tranche or first loss piece and balance as pari-passu investment in all the remaining tranches issued by the SPV. 2) MRR cannot be hedged. 3) Limit on total exposure The total exposure of the originator (including its group entities) should not exceed 20% of the total PTCs issued. Total exposure shall include investment in equity / senior / subordinate tranches issued by Special Purpose Vehicle including through underwriting commitments, Credit Enhancement and Liquidity Enhancement. 4) Re-securitization of assets, Synthetic Securitizations and Securitization with revolving structures are prohibited. 5) The discussion paper on Emerging trends in regulation and supervision of securitization activities of banks issued along with draft guidelines refer to possibility of applying the guidelines on NBFCs as originators and Banks as investors. 6) The above mentioned discussion paper also refers about considerable merit in applying same capital adequacy frame work as applied on transfer through SPV route to other modes of credit risk transfer, like direct / bilateral assignment of pool of loans, with suitable modifications. Impact Stipulation of MHP means higher seasoning of the pool being securitized. Higher seasoning may have favorable impact on the credit profile of the pool. However it will impact the volumes in the securitization market especially in the short term as it will take some time for the portfolio to season. Further the securitization volumes for the short tenure loans like gold loans and microfinance loans, which, typically, have original tenure of 12 months or less will be adversely impacted. As most of the retail asset securitization in India, at present, is direct assignment transactions between NBFC as originators and Banks as investors, RBIs draft proposals, if implemented in its current form, will impact the dynamics of securitization market in India. Prudential Guidelines on Capital Adequacy and Market Discipline New Capital Adequacy Framework (NCAF) issued by RBI in February 2010 Key changes in NCAF applicable on securitization exposures are enumerated below: i) Credit conversion factor of 50% shall be applied on undrawn portion of an unrated eligible liquidity facility irrespective of its original maturity. ii) In cases where Bank is an investor in securitization transaction as well as provider of unfunded credit / liquidity support to the same securitization transaction, it must treat its exposure as if it were not rated. iii) Specific Risk Capital Charge for securitized debt instruments held by Banks under Held for Trading (HFT) category is increased across investment grade rating categories. The Specific Risk Capital Charge for commercial real estate securitization exposures has been also increased across rating categories.

iv) Under Operational Criteria, for de-recognition of assets securitized Bank must have comprehensive understanding of the risk characteristics of its individual securitization exposures and underlying pools, performance information on the underlying pools and understanding of all structural features of a securitization transaction. v) More disclosures for Securitization Exposures under standardized approach.

INDIA & GLOBAL SECURITIZATION MARKETS

The Sub-prime crisis had its roots in excessive lending to the sub-prime sector based on expectations of continued rise in property prices rather than ability of the obligors to repay the loan. This was compounded by the complex structures, excessive leverage and use of the Originate and distribute model. The Indian securitization market, contrary to this, consists predominantly of prime loans based on robust underwriting standards, simple structures and low LTV ratios. Also the Indian securitization market depends less on originate and distribute approach. The regulations in India are also stricter. Some of the commentators have blamed excessive Securitization for the recent global credit crisis affecting the western world; however blaming "securitization" for the recent global mess is like blaming airplanes for air crashes. Securitization is just a tool and its outcome - good or bad will depend on its proper or improper use. Indian securitization market is relatively small as compared to global volumes and there has so far not been a single reported instance of default on securitized paper. Looking at events over the past one year, securitization has acquired a somewhat unsavory reputation. Despite the problems, people do realize the importance of securitization. NISM, in association with National Housing Bank, CARE Ratings, IDBI Bank, i-peritus and Lewtan Technologies had organized a one-day summit, where important participants related to securitization, starting from issuers, arrangers, investors, legal experts, auditors, regulators and rating agency, came together to discuss the way forward, notwithstanding the problems that occurred. The summit focused mainly on the theme of developing the breadth and depth of Indian Securitization market covering challenges that need to be addressed and also to increase liquidity in securitized markets.

CONCLUSION
The securitization market in India, though in its infancy, holds great promise especially in the MBS area. While more complex securitization transactions and public issuance of securitized paper are still a distant dream, appropriate legislation and investor education can give the securitization market in India a much-needed thrust. As has been demonstrated in the case of several developed financial markets, asset securitization is an important building block in creating an efficient and broad-based financial system. The concept is highly relevant to emerging economies, given their capital constraints. An enabling policy framework and the affirmative actions in this regard, from the government, can immensely facilitate the development of the asset-backed securities market in India. From an originator viewpoint, longer term advantages of securitization are that, if used strategically, it will enable them both to grow and to create a sustainable competitive advantage. The growth will come from the funding flexibility it can provide, as the balance sheet will be less of a constraint and the demand for regulatory capital will be proportionately lower. From a developmental perspective, it is absolutely vital to develop the domestic debt capital markets in the country in order to mobilize longer term savings. While pension funds, insurance companies, et al, may function as agencies of such resource mobilization, it is important to create a range of high quality financial assets into which they can invest. These assets can in turn direct the mobilized resources to their appropriate destinations in the larger interests of the nation. Securitized debt backed by receivables from infrastructure financing may well be one category of such assets which could satisfy this requirement. Further, the ninth five year plan estimates the volume of resource requirements in the housing and infrastructure sectors to be of the order of Rs.150,000 crores and Rs.200,000 crores respectively. Such staggering numbers should only persuade speedier development of securitization in the country.

BIBLIOGRAPHY Books: Gordon& Natarajan, Financial Markets And Services, Mumbai, Himalaya Publishing
House, 2009.

Websites: http://www.articlesbase.com/banking-articles/securitization-in-india-3011036.html http://www.scribd.com/doc/29172677/SECURITIZATION http://docs.google.com/viewer?

a=v&q=cache:CoxE0lQRcT0J:www.iief.com/Research/debt_chp21.pdf+recent+debt+se curitization+in+india&hl=en&gl=in&pid=bl&srcid=ADGEEShaXfM7sYnZaggZ7GXb3 z6qy3UadtgOH7E3ophJQG_ZBZQ1Ky4OccVbyisRbs0dyew4Cb2r01Ygno3qgI9tR_oIVZpJMYGQIqvLPtpGo4tocnQ173hFBSubKN4yqISXh478vG&sig=AHIEtbTpQ1E4L5pFUi6zxJVsrPALKHcNsw

http://www.nism.ac.in/index.php?
option=com_content&view=article&id=149&Itemid=71

http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=516 http://www.careratings.com/current/3/7356.pdf http://www.asialaw.com/Article/1971485/Search/Results/Securitization-in-India-TheGold-Rush.html?Keywords=securitization

http://www.crisil.com/Ratings/Commentary/CommentaryDocs/CRISIL-ratings_perf-ofABS-MBS-pools_feb11.pdf

http://www.crisil.com/Ratings/Commentary/CommentaryDocs/CRISIL-ratings_perf-ofABS-MBS-pools_feb10.pdf

ANNEXURE
Review of CRISIL-rated ABS and MBS pools
CRISIL regularly monitors the performance of all transactions through its robust surveillance process. This report summarizes the performance of 165 asset-backed securities (ABS) and 34 mortgage-backed securities (MBS) transactions rated by CRISIL. The underlying asset pools in the ABS transactions are primarily backed by receivables from car or commercial vehicle (CV) loans. Apart from a few transactions wherein the collection performance is weaker, the collection performance of most outstanding pools remains broadly in line with CRISILs expectations. CRISIL has analyzed the performance of the outstanding pools at an asset class level through vintage-based analysis of collection ratios and total over dues in the pools. CRISIL believes that these ratios represent the shortfalls in a pool at any given time. CRISIL has analyzed the monthly collection ratios (MCRs) exhibited by car and CV loan pools. For this collection ratio analysis, CRISIL has considered pools that have amortized by 20 to 80 per cent; this is because collection ratios exhibited by pools in this amortization bucket are a better representation of pool performance. Further, the pools have been segregated into two amortization buckets20 to 50 per cent amortized pools and 50 to 80 per cent amortized pools. This article presents an overview of asset-class performance for car, CV, and residential housing. a) Car pools Across vintages (refer Charts 1 and 2 in Annexure 1), it is observed that the performance of pools originated in 2010 (refers to calendar year, January 1 to December 31) mirrors the robust performance of pools originated in 2006 (the number of transactions in 2006, though, were much higher). The performance of pools originated in 2007 has been the weakest. In December 2010, a median cumulative collection ratio (CCR) of 95.5 per cent was observed in CRISIL-rated car pools. The MCRs (refer to Charts 3 and 4 in Annexure 1) of CRISIL-rated car pools have been viewed in light of the level of pool amortization. The median MCR of pools in the 20-50 per cent amortization bucket has improved as compared to their performance in 2009 (refer to Chart 3 in Annexure 1). The improvement in collection performance is also evident in the CCR Index (refer to Chart 5 in Annexure 1) where the CCR for pools that have witnessed 7-12 month and 13-18 months post securitization is showing an increasing trend. In the 50-80 per cent amortization bucket, the collection performance of pools in 2010 is better when compared with 2009 (refer to Chart 4 in Annexure 1); the collection performance was the weakest in the second half (H2) of 2009 vis-a-vis the other half-yearly periods. This may be attributed to the poorer performance of the weak car pools in H2 2009.

b) Commercial Vehicle (CV) pools The collection performance of pools originated in 2009 and 2010 has been better than those originated in 2007 and 2008. The superior collection performance of recent vintages may be attributed to more stringent underwriting standards adopted by CV financiers in recent times. The collection performance of CRISIL-rated CV pools, which have amortized between 20 and 80 per cent, have shown stronger collection performance in 2010 as compared to 2009 (refer to Charts 3 and 4 in Annexure 2). In 2010, the median MCR has remained stable in the mid-nineties. c) MBS pools The performance of the 34 CRISIL-rated MBS pools has been very strong. Delinquencies have been low, and the utilization of credit-cum-liquidity enhancement to fund credit losses has been minimal. Most pools have performed well, with CCRs in the high 90s. Collection ratios have typically moved up, with increased seasoning in transactions. The MBS pools covered in this report have adequate protection against key risk elements impacting repayment and the performance of these pools is consistent with their current ratings.

Collateralized Debt Obligation (CDO) Ratings: CRISIL has outstanding ratings on thirteen transactions under various single/multi asset CDOs as listed in the table below. The rating as provided in the table represent CRISILs rating view on the transaction as on the date of publication.

Terminologies used:
Originator: The bank or finance company that has originated the pool of receivables Pool Principal: The sum of principal outstanding for all loans present in the pool at the time of securitization Pool Cash flows: The sum of principal and interest outstanding for all loans present in the pool at the time of securitization Future Payout: The total rated obligation towards the PTC holders or the acquirer at the time of securitization Structure: Structure of a transaction can either be at par or at a premium, depending on whether the pool principal is sold at par or at a premium to investors. In case of transactions with interest only (IO) strips, or deferred purchase consideration (DPC), it is suitably mentioned. Also mentioned is any other structural feature present in the transaction, for example Par with turbo amort etc. Asset Class: The asset(s) that back the securitized receivables Cash flow Duration: The weighted average balance maturity of cash flows in months. Monthly cash flows are taken as weights for the purpose of calculating the average Weighted Average Seasoning (WAS): Indicates the weighted average seasoning (in months) of the pool at the time of securitization. Weighted Average Loan to Value (WAL): The weighted average loan to value (LTV) ratio of the pool at the time of securitization. Weighted Average Yield (WAY): The pool yield at the time of securitization Average yield: The current pool yield, calculated as the internal rate of return (IRR) of the pool cash flows Overdue Composition: Indicates the proportion of cash flows pertaining to current contracts, one month overdue contracts and so on at the time of securitization. Weighted average residual maturity (WAM): The weighted average balance maturity of PTCs in months. Monthly payouts to PTC holders are taken as weights for the purpose of calculating the average Deferred Purchase Consideration (DPC) as a percentage of Pool Cash flows: The deferred purchase consideration (DPC) is carved out of the interest portion of the pool available after servicing interest on the acquirers principal balance. It is expressed as a percentage of total pool cash flows. Credit Collateral as a percentage of Pool Cash flows: The credit collateral stipulated at the time of securitization/outstanding as on date as a percentage of total pool cash flows. In case of Mortgage backed securities (MBS) transactions, the credit collateral is expressed as a percentage of pool principal.

First Loss Credit Facility as a percentage of Pool Cash flows: The first loss credit facility stipulated at the time of securitization a percentage of total pool cash flows. In case of Mortgage backed securities (MBS) transactions, the first loss credit facility is expressed as a percentage of pool principal. Second Loss Credit Facility as a percentage of Pool Cash flows: The second loss credit facility stipulated at the time of securitization as a percentage of total pool cash flows. In case of Mortgage backed securities (MBS) transactions, the second loss credit facility is expressed as a percentage of pool principal. Liquidity Facility as a percentage of Pool Cash flows: Indicates the liquidity support available to the transaction, expressed as a percentage of pool cash flows. Some transactions also have an advance payment mechanism, wherein monthly payouts are funded by the liquidity facility, which will be reflected in a high level of utilization of liquidity facility. In case of Mortgage backed securities (MBS) transactions, the liquidity facility is expressed as a percentage of pool principal. Scheduled Excess interest spread (EIS) as a percentage of Pool Cash flows: The embedded cushion available in a transaction on account of the differential between the pool yield and pass-through rate. This is only available in par structures and is expressed as a percentage of the pool cash flows. However, in a few structures, this cushion is diluted as the spread is utilized to make certain payouts like charge-offs, servicing fees, fees to liquidity provider etc. In such cases the actual cushion available to investors due to EIS may be lower than the amount stated herein. In case of Mortgage backed securities (MBS) transactions, the EIS is expressed as a percentage of pool principal Subordinated cash flows as a percentage of Pool Cash flows: In certain transactions, the initial pool cash flows are higher than the total payouts promised to the investors. This could be on account of either overcollateralization (initial pool principal being higher than the principal payouts promised to the investors) or excess interest spread (pool yield being higher than the investor yield). The subordinated cash flows is computed as the difference between the initial pool cash flows and the total payouts promised to the investors expressed as a percentage of initial pool cash flows. In case of transaction structured at par with excess interest spread (either flow-back or trapped), the credit support available in the form of subordinated excess interest spread is reported under Scheduled Excess interest spread (EIS). However, in case of transactions having over-collateral and in case of transactions structured at par with turbo amortization (wherein excess cash flows from the pool are used to prepay the investors principal), the credit support available in the form of subordinated cash flows is reported in this section. Current outstanding rating/credit opinion: The current outstanding rating assigned by CRISIL to senior pass through certificates (PTCs) issued by the SPV or in case of transactions under the Assignment of Receivables programme, it is the opinion provided by CRISIL on their credit profile. The ratings/credit opinions mentioned represent CRISILs view on the transactions as on 16th February 2011 Compliance Status: Indicates whether the compliance process, including Originator/Seller submitting transaction documents to CRISIL, legal review of the transaction documents by CRISIL, and resolution of any issues/queries in compliance, has been completed. CRISIL has used the following indicators to indicate the compliance status of outstanding CRISIL rated securitization transactions. The status is as on 16th February 2011

Months post securitization (MPS): The number of payouts elapsed since securitization Pool Balance: The future payouts, as a percentage of future payouts at the time of securitization. Where information on future payouts is not available, principal outstanding is used instead. Cumulative Collection Ratio (CCR): The ratio of total collections till date to total billings till date. These billings include initial over dues in the pool at the time of securitization except in cases where these over dues are not subordinated. In such cases, the CCR will be understated to that extent in comparison with other pools. Monthly Collection Ratio (MCR): The ratio of monthly collections to monthly billings. These billings and collections do not include prepayments. Total Collection Efficiency Ratio (TCE): The ratio of monthly collections to monthly billings inclusive of overdue billings. These billings and collections do not include prepayments. Cumulative Prepayments (as % of POS): The ratio of cumulative prepayments in a pool to the initial pool principal at the time of securitization. 90 Plus Delinquencies: The unamortized principal plus the overdues on contracts delinquent for more than 90 days plus loss on sale of repossessed assets (wherever available) as a percentage of initial principal at the time of securitization. 180 Plus Delinquencies: The unamortized principal plus the overdues on contracts delinquent for more than 180 days plus loss on sale of repossessed assets (wherever available) as a percentage of initial principal at the time of securitization. 90 Plus Overdues: The overdues on contracts delinquent for more than 90 days plus loss on sale of repossessed assets (wherever available) as a percentage of initial principal at the time of securitization. 180 Plus Overdues: The overdues on contracts delinquent for more than 180 days plus loss on sale of repossessed assets (wherever available) as a percentage of initial principal at the time of securitization.

Credit Collateral Utilization percentage: The credit collateral utilized as on date as a percentage of credit collateral stipulated by CRISIL either at the time of initial rating or at the time of reset. Threshold collection ratio (TCR): The minimum cumulative collection ratio (cumulative collections/ cumulative billings) required on a pools future cash flows, to be able to service the PTC payouts on time. The lower the TCR, the lesser will be the degree of credit risk in the pool. Threshold credit coverage (TCC): TCC represents the ratio of threshold credit loss in a pool (1-TCR) to the actual credit loss as on date, as indicated by the number of contracts/principal outstanding in respect of contracts overdue for more than 180 days (excluding charged off contracts). Glossary of terms used

ABS Pools (Initial Pool Details & Pool Performance)

MBS Pools (Initial Pool Details & Pool Performance)