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1 Conceptual Framework
Securitization
It is a process through which the future income or receivables (the money that is to become due in future) of an organization, are transformed and sold as debt instruments (such as bonds with a fixed rate of return). In respect of banks, a part of their loan portfolio can be packed together and off-loaded in the form the debt instruments (called pass-through certificate) to the prospective investors with the provision that the inflow of cash in the form of recoveries shall be distributed among the investors. This allows the securitizing organization/bank to get funds upfront, which can be put to more productive use in the business. Securitization is the process of conversion of existing assets or future cash flows into marketable securities. In other words, securitisation deals with the conversion of assets which are not marketable into marketable ones. For the purpose of distinction, the conversion of existing assets into marketable securities is known as asset-backed securitisation and the conversion of future cash flows into marketable securities is known as future-flows securitization. Some of the assets that can be securitised are loans like car loans, housing loans, et cetera and future cash flows like ticket sales, credit card payments, car rentals or any other form of future receivables. Suppose Mr. X wants to open a multiplex and is in need of funds for the same. To raise funds, Mr. X can sell his future cash flows (cash flows arising from sale of movie tickets and food items in the future) in the form of securities to raise money. This will benefit investors as they will have a claim over the future cash flows generated from the multiplex. Mr. X will also benefit as loan obligations will be met from cash flows generated from the multiplex itself.

Mortgage Backed Securities (MBS)
The securitization of assets historically began with, and in sheer volume remains dominated by residential mortgages. The receivables are generally secured by way of mortgage over the property being financed, thereby enhancing the comfort for investors. This is because
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mortgaged property does not normally suffer erosion in its value like other physical assets through depreciation. Rather, it is more likely that real estate appreciates in value over time. Further,
• • • •

The receivables are medium to long-term, thus catering to the needs of different categories of investors; The receivables consist of a large number of individual homogenous loans that have been underwritten using standardized procedures. It is hence suitable for securitization. In the US where it originated, these mortgages were also secured by guarantees from the Government; The receivables also satisfy investor preference for diversification of risk, as the

geographical spread and diversity of receivable profile is very large. In the Indian context, the funds requirement in the housing sector is immense, estimated at Rs. 150,000 crore during the current five-year plan. Of this, it is envisaged that about Rs 52,000 crore would be financed by the formal sector. It is unlikely that this gap can be filled out of budgetary allocation or regular bank credit. Securitisation allows this gap to be bridged by directly accessing the capital markets without intermediation. Securitisation tends to lower the cost at which the housing sector accesses funds. It also facilitates a sufficiently deep long term debt market. It is estimated that about Rs 2,500 crore would be mobilized through the securitisation route during the current five-year plan.

Asset Backed Securities (ABS) – Existing assets
(a) Auto loans:

Though securitization was made popular by housing finance companies, it has found wide application in other areas of retail financing, particularly financing of cars and commercial vehicles. In India, the auto sector has been thrown open to international participation, greatly expanding the scope of the market. Auto loans (including installment and hire purchase finance) broadly fulfill the features necessary in securitisation. The security in this case is also considered good, because of title over a utility asset. The development of a second hand market for cars in India has also meant that foreclosure is an effective tool in the hands of auto loan financiers in delinquent cases. Originators are NBFCs and auto finance divisions of commercial banks. (b) Investments:
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Investments in long dated securities as also the periodical interest instruments on these securities can also be pooled and securitized. This is considered relevant particularly for Indian situation wherein the FIs are carrying huge portfolios in Government securities and other debt instruments, which are creating huge asset-liability mismatches for the institutions. Government securities issued domestically in Indian Rupee can be bundled and used to back foreign currency denominated bonds issues. It would more be of the nature of derivative. The subordinated Government securities are intended to absorb depreciation in the value of the rupee thereby protecting to certain extent the senior securities that the Government securities back. The senior securities are directed at the international capital markets and are structured using offshore SPVs by countries like Mexico. Similarly, under the STRIPs mechanism, the interest coupons on the Government dated securities are separated and traded in the secondary markets. Such interest instruments can also be bundled and securitized in the normal asset securitization method. (c) Others: Financiers of consumer durable, Corporates whose deferred trade receivables are not funded by working capital finance, etc are Originators of other asset classes amenable to securitisation. Corporate loans, in a homogeneous pool of assets, are also subject to securitization there is virtually no known instance so far in the United States or in other countries of an ABS transaction having failed. This is despite the fact that the markets for ABS are exceptionally large. Industry experts attribute this to three main factors. ABS transactions are always planned, prepared and carried out with great care. Second reason is the intrinsic value of the paper and in particular the high level of transparency on the quality of the underlying assets. Third, ABS transactions are sponsored generally by large and well known institutions which can't afford to jeopardize their reputation with investors, the majority of which are institutional investors.

Process of the securitization

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Originator Asset Pool

SPV

Credit enhancement

Issue proceeds
Class "A" Notes Class "C" Notes

Note issue

Class "B" Notes Class "C" Notes

Parties Involved in Securitization
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Originator / Seller – Originates assets either directly into the SPV or alternatively sells assets from existing balance sheet to the SPV. Servicer / Administrator / Mortgage Manager – Post securitization, the seller/originator is typically appointed to act on behalf of the SPV as the servicer of the asset portfolio. – 3rd party servicers exist in the market to act as servicer where the originator/seller may not have the expertise (e.g. staff and information systems) to service the assets. – In some instances a back-up servicer is appointed.
– Some servicers may be formally evaluated for their servicing strength by the rating

agencies. Manager – Appointed to the SPV to make certain decisions regarding the operation of the securitization program, e.g. the issue of debt securities, directing the trustee on distribution payments, exercising call options etc. – Often the Manager is a wholly owned subsidiary of the seller/originator. Trustee – For SPV trusts the Trustee is appointed to act on behalf of secured creditors. Grants a charge of the assets of the SPV in favour of the Security Trustee. – The Trustee owns the assets (either beneficial ownership or legal ownership) and debt securities are issued in its name, e.g. Perpetual Trustees as trustee for XYZ 2005-1 Trust. – The Trustee is directed by the Manager to make payments to investors and undertake certain actions. Security Trustee – Takes benefit of a charge of the assets of the SPV.
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monoline insurers. Lawyers 6 . call dates etc. highly rated financial institutions. tranche sizes. Standby Guarantees. – Derivative Providers (interest rate swaps.– Under certain circumstances (e.g.g. highly rated financial institutions.g. – Liquidity Support. – Assign a credit rating to the debt securities which provides a benchmark of credit worthiness to potential investors / financiers involved in the securitization transaction. e. e. Joint Lead Managers. – The Security Trustee also acts in a fiduciary capacity and must act in the interests of secured creditors Rating Agencies – Perform a credit assessment in respect of the assets to be securitized and the terms of the debt securities to be issued. e. cross currency swaps. undertake surveillance of the transaction and release performance reporting. – Following the closing date. liability swaps). e. weighted average life. GIC etc Arranger & Dealers – Arranger: structures the profile of the debt securities to best meet investor demand. Also performs a co-ordination function. e. Support Facility Providers – Credit Support. Also provide secondary market support for the debt securities post closing. call meetings of secured creditors. Co Managers – distribute the debt securities to investors and may also underwrite the placement. Redraw Facilities.g. event of default) the Security Trustee may enforce the charge. – Other.g. – Dealers/Underwriters: Lead Manager.g. and appoint a receiver/liquidator to realize the assets of the SPV to repay secured creditors.

true sale and insolvency) and a tax opinion (i. • Limitation of risk As the transaction is an asset sale. the Seller's asset base is reduced which may improve return on assets (ROA) and return on equity (ROE) without adversely impacting revenue streams.e. • Invisible to customers As the sale of assets is typically by way of equitable assignment. For the Investor. covering tax neutrality. This would also result in an improved EVA position. –The seller/originator’s counsel will generally issue a transaction opinion (i. Benefits of Securitizations For the Seller. • Improved financial ratios As the transaction is generally an asset sale. recourse is generally limited to the level of credit support provided by the Seller. • Flexible finance The Seller can vary the level of funding required dependent on its financing needs and the volume of assets available for sale to the SPV. The main benefits flowing for an Investor in acquiring debt securities issued under an asset securitization programmed include:• High credit quality 7 . source of funds. there is no notification required to customers and the Seller maintains the direct relationship with those customers. withholding tax etc). covering enforceability.e. The principal benefits for a Seller in securitizing its assets include:• Diversification of funding sources A securitisation may provide the Seller with access to a new class of investors and therefore.– Act for various parties involved in the transaction.

it has been decided to adopt the '90 days overdue' norm for 8 . • A diversification of investment opportunities Asset securitisation allows investors to indirectly invest in a variety of asset classes. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. in respect of an overdraft/ cash Credit(OD/CC). recovery climate. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose. iv.Asset securitisation typically results in the securities issued carrying the highest possible credit ratings afforded by the internationally recognized rating agencies. NPA (non performing asset) Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset. it was decided to dispense with 'past due' concept. Due to the improvement in the payment and settlement systems. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan. doubtful or loss asset. with effect from March 31. Accordingly. as from that date. up gradation of technology in the banking system. 2001. which has been classified by a bank or financial institution as sub-standard. in accordance with the directions or guidelines relating to asset classification issued by RBI.. iii. Non Performing Asset means an asset or account of borrower. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted. a Non performing asset (NPA) shell be an advance where i. ii. With a view to moving towards international best practices and to ensure greater transparency. The account remains 'out of order' for a period of more than 180 days. v. etc.

faced similar banking problems in 1997 which became popular as the Asian currency crisis. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power. form the year ending March 31. Since 1970s. Non Performing Assets (NPA) is one of the biggest challenges plaguing local banking. inrespect of an overdraft/ cash Credit (OD/CC). According to the Ministry of Finance. 'Out of order' An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. these account should be treated as 'out of order'. but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period.000 crore to Rs 1 lakh crore. Asia. non-performing assets (NPA) of public sector banks in India range between Rs 70. with effect form March 31. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose. The account remains 'out of order' for a period of more than 90 days. Overdue Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank.identification of NPAs. v. ii. over 93 countries have faced banking problems. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. iii. 2004. i. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. Accordingly. iv. NPAs of banks and 9 . Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan. a non-performing asset (NPA) shell be a loan or an advance where. too. 2004.

Tangible assets 2. The repayment of loan depends upon the borrowers: a. In the early 1990s. Countries like Malaysia. Character 2. Honest 3. Reputation of borrower The banker should. Taiwan and Indonesia are way ahead of India and have successfully managed to curtail NPAs. Principle of liquidity iii. Willingness to pay Capacity to pay depends upon: 1.000 crore in public sector banks to recapitalise their eroded capital base. Capacity to pay b. Success in business Willingness to pay depends on: 1.financial institutions (FI) account for over 5% of our GDP. Principles of safety ii.Principles of safety By safety it means that the borrower is in a position to repay the loan both principal and interest. Major lending institutions in India. businesses remain highly leveraged. Principles of profitability I. Since most economic expansions are funded by debt. But these sort of banking problems forced policy makers to enact stringent laws to penalise defaulters. • Inappropriate technology 10 . are handicapped with mounting NPAs. No wonder financial institutions like the IDBI and the IFCI have to be bailed out with hefty rescue packages. Hitherto. specially state-owned.he should be a person of integrity and good character. the government had infused over Rs 20. i. therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully . Internal factors of NPA • Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. archaic laws tilted in favour of borrowers made it difficult for banks and FIs to recover debts.

viability. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”. If a new big customer meets misfortune or certain traders or industries affected adversely. thus NPA. From external credit rating agencies. • Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. While providing unsecured advances the banks depend more on the honesty. • Improper swot analysis The improper strength. Purpose of the loan When bankers give loan. market driven decisions on real time basis can not be taken. Analyse the balance sheet True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. All the branches of the bank should be computerized. Enquiry from market/segment of trade. Transferability. opportunity and threat analysis is another reason for rise in NPAs. and financial soundness and credit worthiness of the borrower. business. industry. Banks should consider the borrowers own capital investment. Safety 4. he should analyse the purpose of the loan. it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. • Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. weakness. Bank should analyse the profitability. it should collect credit information of the borrowers from a. Proper MIS and financial accounting system is not implemented in the banks. banks should grant loan for productive purpose only. They should use good credit appraisal to decrease the NPAs. integrity. c. the overall 11 . To ensure safety and liquidity.Due to inappropriate technology and management information system. Acceptability 3. long term acceptability of the project while financing. Marketability 2. which leads to poor credit collection. From bankers b. When accepting securities banks should consider the 1.

The NPAs due to wilful defaulters can be collected by regular visits. The growth in credit off take of banks has been the second highest in the last 55 years.77lakhs).60lakhs). Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The biggest defaulters of OSCB are the OTM (117. how are the banks funding this increased credit off take? Banks essentially have been selling their investments in government securities. with the deposit inflow being less than the credit outflow. By selling their investments and giving out that money as loans. • Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Once the banks reach this level of 25 12 . the NPAs of OSCB is increasing day by day. But at the same time the incremental credit deposit ratio for the past one-year has been greater than one. The growth of credit off take though has not been matched with a growth in deposits. primarily because banks have to maintain an investment to the tune of 25 per cent of the net bank deposits in statutory liquidity ratio (SLR) instruments (government and semi government securities). So the question that arises is. Impact on banking Other than freeing up the blocked assets of banks. Due to re loaning to the defaulters and CCBs and PACs. • Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. the banks have been able to cater to the credit boom. securitisation can transform banking in other ways as well. and the handloom sector Orissa hand loom WCS ltd (2439. The fact that they have been selling government paper to fund credit off take means that their investment in government paper has been declining.position of the bank will not be affected. What this means in simple terms is that for every Rs 100 worth of deposit coming into the system more than Rs 100 is being disbursed as credit. and Orissa hand loom industries. Like OSCB suffered loss due to the OTM Cuttack. This form of funding credit growth cannot continue forever.

"What may be more 13 . On acquiring bad loans ARCs restructure them and sell them to other investors as PTCs. it so happens that the seller is the loan side of the same institutions and buyer is the treasury side.per cent. Chairman of State Bank of India. Banks can securitise the loans they have given out and use the money brought in by this to give out more credit. Citicorp (I) Finance. act as debt aggregators and are engaged in acquiring bad loans from the banks at a discounted price. It sold 134 cases worth Rs. "We have got a buyer. in order to keep giving credit. securitisation also helps banks to sell off their bad loans (NPAs or non performing assets) to asset reconstruction companies (ARCs). ARCs. ARCIL's Chief Executive as saying. What is happening right now is that banks and FIs have been selling their NPAs to ARCIL and the same banks and FIs are picking up the PTCs being issued by ARCIL and thus helping ARCIL to finance the purchase. Rajendra Kakkar. thereby helping banks to focus on core activities. some banks could reach this level very fast. ARCIL is keen to see cash flush foreign funds enter the distressed debt markets to help deepen it. HDFC. IDBI. they cannot sell any more government securities to generate liquidity. Asset Reconstruction Company of India Limited (ARCIL) was the first (till date remains the only ARC) to commence business in India.the second largest bank in India has been the largest seller of bad loans to ARCIL last year. HDFC Bank and some other banks have shareholding in ARCIL. A K Purwar. we have got a seller. One way is obviously to increase interest rates. as their investments into PTCs issued by ARCIL will generate returns if and only if ARCIL is able to affect recovery from defaulters. ICICI bank.A lot of banks has been selling off their NPAs to ARCIL. which are typically publicly/government owned."So the risk from the balance sheet of banks and FIs is not being completely removed. And given the pace of credit off take. SBI and IDBI hold second and third positions. thereby freeing the banking system to focus on normal banking activities. Another way is Securitization. SBI. A recent report in a business daily quotes. So banks. in a recent interview to a business daily remarked that bank might securitise some of its loans to generate funds to keep supporting the high credit off take instead of raising interest rates. As per the survey. Karur Vyasya Bank. PNB. Karnataka Bank. ICICI Bank. Not only this. says that securitisation is the way to go for Indian banking.8450 Crore. need to ensure that more deposits keep coming in. A recent survey by the Economist magazine on International Banking.

Securitization of NPA in India Quality of bank assets has visibly improved . with decline reported in sub standard. Securitising micro-loans.5% in FY07. Source: RBI As on 31 Mar 07. as NPAs recovered and written-off exceeded the fresh addition of NPAs during the year. One private bank. Standard assets for all SCBs in FY07 were higher by Rs 4. which was marginally lower compared to Mar 06. securitized $4. But most Indian banks are more interested in competing for affluent customers".important for the economy is to provide access for the 92% of Indian businesses that do not use bank finance.5% in FY06 to 97. That represents an enormous potential market for both local and foreign banks.may be the way of achieving economies of scale. but the present structure of the banking system is not suitable for reaching these businesses. at Rs 18.bundling many loans together and selling the resulting cash flow.432 bn.3 million of micro-loans last year. gross NPAs of SCBs were at Rs 505 bn. The proportion of standard assets rose across all bank groups in FY07 with public sector banks showing a greater recovery compared to the other two groups.209 bn compared to FY06. 14 . doubtful and loss assets. ICICI.standard assets as percent of all loan assets for SCBs moved from 96.

15 .1 % in FY06 while sub-standard assets formed 1%. The guidelines were partially modified in 2007.Standard assets formed 97. subject to full recovery in three years. including valuation and pricing.8% as on Mar 07 .2% of the total advances vis-à-vis 96. Guidelines on sale/purchase of NPAs were issued in Jul 05.Asset Classification in Banks Source: RBI The ratio of NPAs in overall advances has been declining and has touched 2. This declining trend has been seen for the last four fiscal years.6% compared with FY06. The value of gross NPAs for FY07 at Rs 505 bn was lower by 2. wherein it was stipulated that at least 10% of the estimated cash flows should be realised in the first year and at least 5% in each half year thereafter. covering the procedures for purchase/sale of NPAs. Not only has the value of gross NPAs fallen but also the recovery as a percent of gross NPA has been increasing.

banks since 2004 have recovered to the tune of Rs 12. which was marginally lower by Rs 0. though FY07 was an exception.Source: RBI. the recoveries were higher compared to the additions. Even in absolute terms. For FY07.250 mn through one-time settlement and compromise schemes for SMEs. LVI Rs 130. the rest recovered through 16 . In addition to their own internal recovery processes. the recovery of NPAs for the SCBs stood at Rs 261. Through these four schemes SCBs have recovered Rs 255. Rs 6. NPA Recovery Trends of SCBs Source: RBI.330 mn through Lok Adalats. D&B Research The ratio of recovery to Gross NPAs has consistently been higher than addition of NPAs. D&B Research Scheduled commercial banks stepped up recovery efforts through numerous methods.200 mn of non-performing loans between FY04-FY07.030 mn through Debt Recovery Tribunals and Rs 106.6 bn.590 mn through SARFAESI Act.5 bn compared to additions of NPAs.

which have been disbursed by Banks.420. is an impressive Rs 89.5 mn. The restructuring has been done largely under the Corporate Debt Restructuring (CDR) Mechanism. D&B Research Loan restructuring There has been a perceptible increase in the structuring of loans. 17 . In FY07. The total loan structured under this mechanism. both corporate as well as noncorporate debt. since 2004 to 2007. Over the years.other internal schemes.180 mn. Note: NPA recovery through OTS/DRTs/Lok Adalats/SARFAESI Act Source: RBI. the recovery methods adopted by SCBs have obviously paid-off. the total recovered amount was Rs 73.

152 cases have been approved by CDR cell amounting to Rs 786. 18 .Note: Total structured loan is the sum of non-corporate debt structured by SCBs and loans under CDR Source: RBI. D&B Research As on Oct 2006. Further. the net cases under CDR stood at 108 with total debt consideration of Rs 526.9 bn.1 bn. taking into account the withdrawal cases along with exited and merged ones.

as on Jun 07. The security receipts subscribed to by banks amounted to Rs 69 bn. while the security receipts redeemed amounted to Rs 6 bn. According to RBI.Source: Corporate Debt Restructuring Cell Securitization via the SARFAESI Act has been the much-preferred route among banks in recovering bad debts. the book value of total amount of assets acquired by the SCs/ ARCs stood at Rs 255 bn. 19 . Though the use of this route has largely been among the private and foreign banks.

Among the microeconomic systemic failures were: wanton securitisation. It was a process through which illiquid assets were packaged. Securitisation refers to conversion of cash flows into marketable securities. It involves substantial costs. converted into tradable securities and sold to third party investors. second. and competitive international de-regulation. at least in the short run. privately rational but socially inefficient disintermediation. Reddy & Vadlamannati (2004) studied a wide variety of financial markets have been characterized by the growth in securitization during the past twenty years as numerous advantages accrue from holding financial assets in securitized rather than whole loan form. first. In this paper they build a model of asymmetric information in the 20 . Over the last decade securitization has migrated from the United States into Europe and the rest of the world and taken a permanent hold on the fixed income market. Irala. complexity and a longer time period to complete it. and the procyclical behavior of leverage in much of the financial system and of the Basel capital adequacy requirements. excessive global liquidity creation by key central banks and. builded a simple model to look at the effect of securitisation on the banking system. The crisis was the product of a 'perfect storm' bringing together a number of microeconomic and macroeconomic pathologies. While Securitization serves as a powerful tool of financial reengineering. fundamental flaws in the rating agencies' business model. brought about by the entry of a number of high-saving countries (notably China) into the global economy and a global redistribution of wealth and income towards commodity exporters that also had. an ex-ante global saving glut.1. striking a securitization deal is not that simple. high propensities to save. Among the macroeconomic pathologies that contributed to the crisis were.2 REVIEW OF LITERATURE Buiter (2007) studied the causes of the financial crisis of 2007 and considered proposals for mitigation and prevention of future crises. Sowerbutts (2009). and sometimes economic and capital requirements. Securitisation has arrived in a developing country like India much faster than expected. Proximate local drivers of the specific way in which these problems manifested themselves were regulatory and supervisory failure in the US home loan market. Securitization may help Indian Banks reduce their regulatory.

The study also articulates the methodology for dealing with the granularity problem. their containment at minimum levels and ensuring that their impingement on the financials is minimum. Furthermore.secondary market for loans and a 'lemons' problem faced by uninformed agents who buy these loans. it outlines the Indian banking sector scenario in respect of capital adequacy for the period 1996-97 to 2002-03. Although the secondary loan market delivers welfare increases it is also unstable. the market reaction to the security issues announcement. It is also found that agency costs of managerial discretion play a role in explaining an identified negative market reaction to the securitisation issue and the subsequent bank investment behavior Sinha (2006) said Capital adequacy stipulations at the global level have become more demanding following the Basel Committee's initiative to introduce internal model-based capital charge. the ex-ante characteristics of the banks choosing this funding source. Three aspects related to the issue of any security are analysed: first. Expected Shortfall (ES) and Expected Excess Loss (EEL) that may be used to determine the regulatory capital. and third. Pais (2005) examined the role of securitisation in the capital structure of banks.Value at Risk (VaR). But no definite relationship between the CRAR and bank size could be determined from the analysis. The results indicate that banks with worse capital ratios. The basic element of Sound NPA Management System is quick identification of Non-performing advances. but only when other investment opportunities are good. second. the ex-post characteristics of the issuing banks. This article considers the three alternative paradigms . 21 . We show how the emergence of secondary markets can lead not only to a fundamental increase in asset prices but also to a change in return correlations from negative to positive across asset classes. We show how certain conditions can sustain a secondary loan market even when banks have inside information about their borrowers. Results of panel regression show that Tier I CRAR of Indian commercial banks is positively related to operating efficiency and has a negative relationship with NPA ratio. Joshi (2003) analyzed Profitability and Viability of Development Financial Institutions are directly affected by quality and performance of advances. low quality assets and poor performance are more likely to use securitisation.

Return on Investment proved that the overall profitability and the position of selected banks was sustained at a moderate rate. The study reveals that the profitability position was reasonable during the period of study when compared with the previous years. The main idea of this article is to make an evaluation of the financial performance of Indian private sector banks. it was observed that the return on net worth had a negative correlation with the debt equity ratio. Banks should manage their exposure limit to few borrower(s) and linkage should be placed with net owned funds for developing control over high leverages of borrower level. Sinha (2006) said For commercial banks operating in India. which indicated the company's ability to meet the interest obligations. Exchange of credit information among banks would be immense help to them to avoid possible NPAs. off balance sheet activities have become important in the reform years 22 because of the following reasons: . Interest income to working funds also had a negative association with interest coverage ratio and the Non-Performing Assets (NPA) to net advances was negatively correlated with interest coverage ratio. Balasubramanian (2007) examined Private sector banks play an important role in development of Indian economy. Interest coverage ratio was continuously increasing. During the study period. RBI permitted new banks to be started in the private sector as per the recommendation of Narashiman committee. though at one point of time it was very high. The economic reforms totally have changed the banking sector. But now the situations have changed new generation banks with used of technology and professional management has gained a reasonable position in the banking industry. it was evident that the companies were maintaining 1:1 ratio.Excessive Reliance on Collaterals has led Institutions to long drawn litigations and hence it should not be sole criteria for sanction. Capital adequacy ratio was constant over a period of time. With respect to debt equity position. The Indian banking industry was dominated by public sector banks. It is concerned with examining the profitability position of the selected sixteen banks (BANKEX-based) for a period of five years (2000-01 to 2006-2007). Management Information system and Market intelligence should be utilized to their full potential Singla (2008) examined financial management plays a crucial role in the growth of banking. After liberalization the banking industry under went major changes.

by virtue of its very nature of business. India is no exception to this swing towards market-driven economy. The future of banking will undoubtedly rest on risk management dynamics. Foremost among them is the wind of economic liberalization that is blowing across the globe. The econometric exercise indicates that off balance sheet activity is positively related to operating profit ratio and negatively related to NPA ratio. capital adequacy and NPA incidence on the (off balance sheet) risk taking behavior of the Indian commercial banks. Further. inherits. Financial Institutions. therefore. Further. however. risk is omnipresent in the real world. However. This is one area where the banks must pay adequate attention to improve their financial health. Arunkumar. the paper seeks to find out. .(i) The deregulation of the banking sector entry and relaxation of branch licensing policy resulted in substantial decline in banking sector spread (in terms of total assets) compelling the commercial banks to look for some other source of income. (ii) The introduction of asset classification. This reinforces the hypothesis that strong banks have greater market risk taking ability as compared to the weak banks. in the context of a panel data framework. The paper seeks to compare the Indian commercial banks (for the reform period) in respect of their ability to generate income out of off balance sheet activities by using the Data Envelopment Approach. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. This has. should manage the risk efficiently to survive in this highly uncertain world. not avoiding it . Without risk. acquired a greater significance in the recent past for various reasons."Risk is the fundamental element that drives financial behavior. the impact of operating efficiency. The results obtained from the non-parametric exercise show that the public sector commercial banks are lagging behind the private sector commercial banks in terms of off balance sheet activities. income recognition and capital adequacy norms made lending a relatively risky proposition. Credit risk is the oldest and biggest risk that a bank. the financial system would be vastly simplified. Only those banks that have efficient risk management system will survive in the market in the long run. Better credit 23 .Kotreshwar (2006) examined "Banks are in the business of managing risk. almost all the commercial banks exhibited decreasing returns to scale which is not very encouraging for the banking sector.

An important fall out of these stringent measures is that the defaulters have realized that one-time settlement with lending banks is more beneficial than resorting to litigation which has less chances of success as more favorable legislations for banks are in place. This paper revisits the various legislations and regulations that address the recovery of NPAs and evaluates their impact on recovery performance of banks. He examined banks' behavior in the context of emerging credit markets." Bhaumik (2005) Used bank-level data from India. and regulations regarding treatment of NPA and lending restrictions imposed by the Reserve Bank of India. Das (2002) analysed a solution to the problem of NPA in the small scale industries under the present circumstances of banking and insurance working together under the same roof. Ramakumar (2007) examined the recovery of stressed assets or Non-performing Assets (NPA) through legal and regulatory recourses is critical to the sustainability of banks. "a bank's success lies in its ability to assume and aggregate risk within tolerable and manageable limits. Finally. the diversity of the potential pool of borrowers to whom a bank can lend. In the past fifteen years. for nine years (1995-1996 to 2003-2004). Our results indicate that the credit market behavior of banks in emerging markets is determined by past trends. we find evidence that suggest that credit disbursal by banks can be facilitated by regulatory and institutional changes that help banks mitigate the problems associated with enforcement of debt covenants and treatment of NPA on the balance sheets.portfolio diversification enhances the prospects of the reduced concentration credit risk as empirically evidenced by direct relationship between concentration credit risk profile and NPAs of public sector banks. What is stressed in this article is the pressing need of the small-scale entrepreneur for becoming aware and educated in modern business management holding a professional attitude toward rational decision-making and banks have to facilitate that process as a part of the credit policy sold by them. policymakers have been experimenting with several legislations to improve the recovery mechanism in banks. On the basis of these results. we speculate on some possible policy recommendations. 24 .

This paper reviews the current scenario of the securitization market in India and then goes on to adopt a three pronged focus. non-performing loan portfolios are assets that are frequently securitized. expansion of consumer credit in 25 . thereby funding the originator for his financial requirement. repackage and sell has also modified banks' abilities to grant credit and the effectiveness of the bank lending channel of monetary policy. The Investors Perspective focuses on the benefits accruing to the Investor who invests in a securitization deal with the help of a vehicle called the special purpose entity. we find that the use of securitisation appears to shelter banks' loan supply from the effects of monetary policy. After briefly introducing the concept of securitization popularly known as "Asset Securitization". Securitisation activity has also strengthened the capacity of banks to supply new loans but this capacity depends upon business cycle conditions as well as upon banks' risk positions. The originator's perspective basically focuses on the benefits accruing to the originator of the securitization deal. Using a large sample of European banks. Kanwal (2007) studied the tool of securitization found its place in the Indian capital markets in the year 1991 when the first deal of securitization took place . But securitization of these bad loans has not occurred in Russia at the levels one might expect. Lastly The Economy's Perspective identifies how the national economy would be benefited by introducing the mechanism of securitization in its capital markets. it presents the different perspectives of the stakeholder’s viz. In other countries. Investor and the Indian Economy. This has been due to both a relatively small amount of loans that under-perform as well as legal and regulatory impediments that have discouraged investors and lenders alike. the Originator. In this respect the recent experience of the sub-prime mortgage loans crisis is very instructive. Ferguson (2007) said Asset securitization is a burgeoning trend in Russia as companies burdened by poor credit ratings seek access to capital at lower costs than they would be allowed in traditional equity or debt markets. Thereby it identifies the multidimensional benefits of securitization for India whose capital markets are still developing.Gambacorta (2007) increased in securitization activity has modified the functioning of credit markets by reducing the fundamental role of liquidity transformation performed by financial intermediaries. We claim that the changing role of banks from originate and hold to originate. However.

Although we incorporate a simplified sensitivity analysis of the varying levels of capital charges depending on the security design of asset securitization transactions. which will be logically paired with an increased interest of Russian lenders in securitizing these assets. those impediments are being scaled back to make way for market participants to engage in such securitizations. and liquidity risk. The empirical analysis assesses how macroeconomic factors and bank-specific parameters affect NPAs of a particular category of banks. This paper aims to find the fundamental factors which impact NPAs of banks. is developed and the behavior of NPAs of the three categories of banks is observed. The macroeconomic factors of the model included are GDP growth rate and excise duty. Vallabh(2007) explored an empirical approach to the analysis of Non-Performing Assets (NPAs) of public. this article anticipates a significant rise in the level of non-performing. macroeconomic factors and bank-specific parameters. The NPAs are considered as an important parameter to judge the performance and financial health of banks. This model tries to extend the methodology of widely-known Altman model. Thus. and foreign sector banks in India. viz. A model consisting of two types of factors. We carefully highlight the pathology of the new “securitisation framework” to facilitate a general understanding of what constitutes the current state of computing adequate capital requirements for securitized credit exposures.Russia and the circumstances under which it is occurring indicate that the level of nonperforming loans is due to rapidly increase and as the rationale for maintaining the impediments that stand in the way of securitizing these loans is being re-examined. we do not engage in a profound analysis of the benefits and drawbacks implicated in the new securitisation framework. and the bank-specific parameters are Credit Deposit Ratio (CDR). Jobst (2005) provided a comprehensive overview of the gradual evolution of the supervisory policy adopted by the Basle Committee for the regulatory treatment of asset securitisation. The co linearity between independent variables was measured by Durbin-Watson test and VIF characteristic and it 26 . The level of NPAs is one of the drivers of financial stability and growth of the banking sector. private. loan exposure to priority sector.. Capital Adequacy Ratio (CAR). The results show that movement in NPAs over the years can be explained well by the factors considered in the model for the public and private sector banks.

The factors included in the model explains 97.Findings – The results indicate that bank size is a significant determinant of whether a bank securitizes. The other important results derived from the analysis include the finding that banks' exposure to priority sector lending reduces NPAs. securitization and risk. A matched sample approach was used to test fundamental financial similarities and differences between securitizing and non-securitizing banks. Design/methodology/approach – First.was found to be a little for public and private banks. the fundamental financial similarities and differences between banks that securitize assets and banks that do not participate in the securitization market are tested. Second. the panel data set is large relative to past studies.Montréal and Harchaoui (2002) examined the rapid growth of off-balance-sheet activities raises a number of interesting issues regarding the relationship between banks capital. This paper is the first attempt that empirically investigates this relationship. Using a sample of 112 banks that securitize different assets. variables that help predict whether a bank securitizes assets are analyzed. an examination was made of how different classes of assets affect the banks' risk-based capital ratios and test the capital arbitrage theory of securitization. A quarterly panel data set of these banks dating back to 2001 is used. Uzun (2007) offered a comprehensive comparison of the characteristics between banks that securitize and banks that do not and to provide evidence of the capital arbitrage theory of securitization. the determinants of securitization extent in banks that securitize assets are investigated – for general securitization extent and for specific type of asset securitized. Third. The evidence for Canada over the 1988–1998 period indicates that a) securitization has negative effects on both Tier 1 and Total risk-based capital ratios. Further. In addition to aggregated securitization. a matched sample of banks that do not securitize based on entity type and size is created. Dionne. Originality/value – Utilizing a unique data set of quarterly data from bank Call Reports.1% (adjusted R-square value of regression results) of variations in NPAs of public banks and 76. overall securitization extent is negatively related to the bank's capital ratio (in support of capital arbitrage theory).9% of the same of private banks. but this result is primarily driven by credit card securitization. and b) 27 .

stamp duty-efficient sale structures. CONDOR has the ability to issue differentially-rated series of debt instruments against Australian government and corporate debt securities (including asset-backed securities). The article also discusses one of the major legal issues confronting securitizations in Australia: whether or not there has been a "true sale" of the securitized assets to the securitisation vehicle. that banks might be induced to shift to more risky assets under the current capital requirements for credit risk. infrastructure finance loans.there exists a positive statistical link between securitization and banks’ risk. Jobst (2007) surveyed the attendant benefits and drawbacks of asset securitisation on both financial institutions and firms. auto receivables and other receivables.Tisdell (2000) explained the various types of Collateralized Debt Obligation (CDO) securitizations and provides an overview of "CONDOR" (Collateralized Originated Notes Diversified Obligor Revenues). Vink and Thibeault (2008) provided empirical evidence demonstrating a relationship between the nature of the assets and the primary market spread. trade receivables. where the securitized assets include loans. These results seem to accord with Kim and Santomero (1988) result. Establishing that there has been a true sale of the assets being securitized to the securitisation vehicle is a necessary pre-condition to obtaining off-balance sheet treatment for those assets. This article examines the legal mechanisms for the sale of securitized assets in Australia. a true sale is required to ensure that the risk capital held against the loans is freed-up. It is also authorized to implement synthetic securitizations of loans and other receivables. housing loans. Ali . a CDO securitisation programme established by Citibank in Australia. In addition. It also elicits salient lessons to be learned about the securitisation of SME-related obligations from a cursory review of SME securitisation in Germany as a foray of asset securitisation in a bank-centered financial system paired with a strong presence of SMEs in industrial production. The model also provides predictions on how other pricing characteristics affect spread. project finance loans. since little is known about how and why spreads of asset-backed securities are influenced by loan tranche 28 . in late 1999. corporate loans. and the issue of whether notice of the sale must be given to the underlying obligors.

MBS issues represent 1. but that there are also important univariate differences to consider.12 billion). Furthermore.85 billion) of which 1. and 582 are CDO issues (worth €64.783 issues (worth €320. the credit rating dummies are the most important variables to determine loan spread at issue. In addition. Taking these three classes as a whole. as implied by the differences in impact of the pricing factors on the loan spread between these security classes.83 billion). Nonetheless. We find that the nature of the assets has a substantial impact on the spread across all samples.90 billion) have been classified as ABS. We have investigated how common pricing factors compare for the main classes of securities. We found that most of the common pricing characteristics between ABS. applying the same pricing estimation model to each security class revealed that most of the common pricing characteristics associated with these classes have a different impact on the primary market spread exhibited by the value of the coefficients. we have documented that the assets attached as collateral for the securities differ between security classes. the relevant pricing factors for these securities should differ.467 loans (worth €548. too. Vink and Thibeault (2008) said the capital market in which asset-backed securities are issued and traded is composed of three main categories: ABS. MBS and CDO differ significantly. variations of the specifications were estimated in order to asses the robustness of the conclusions concerning the determinants of loan spreads. The regression analyses we performed suggest that ABS. Of the remaining characteristics.102 (worth €163. indicating that primary market spread with backing assets that cannot easily be replaced is significantly higher relative to issues with assets that can easily be obtained. We were able to examine a total number of 3. Yener. We find that default and recovery risk characteristics represent the most important group in explaining loan spread variability. We claim that the changing 29 .characteristics. credit rating is not a sufficient statistic for the determination of spreads. Due to the differences in the assets related to these securities. MBS and CDOs. MBS and CDOs are in fact different instruments.Gambacorta and Marqués (2007) examined the dramatic increase in securitisation activity has modified the functioning of credit markets by reducing the fundamental role of liquidity transformation performed by financial intermediaries. Within this group. only marketability explains a significant portion of the spreads’ variability.

Securitisation activity has also strengthened the capacity of banks to supply new loans but this capacity depends upon business cycle conditions and. Ali . Securitisation . under Anglo-Australian law. Securitisation and Asset Management. Low-cost funding and increased balance-sheet liquidity raise bank willingness to approve mortgages that are hard to sell (jumbo mortgages). the increasing depth of the mortgage secondary market fostered by securitization has reduced the impact of local funding shocks on credit supply. upon banks’ risks positions. Insurance Securitisation .Convergence of the Insurance and Capital Markets. Securitisation is significant not only as a financing tool. De and Robbe (2003) provided a practitioner-oriented guide to the key legal and structuring issues that arise in innovative securitisation transactions. The transactions on which the book focuses are the securitisation of non-traditional assets and the disaggregation of financial assets into their component risks and the synthetic securitisation of discrete risks. Thus.An Introduction.Merger of Credit Derivatives. Intellectual Property Securitisation Crystallizing the Value of Brand Names and Ideas. notably. Whole of Business Securitisation Unlocking the Wealth Within. Synthetic Securitisation . Using a large sample of European banks. Hedge Fund Securitisation . thereby mitigating the real effects of monetary policy. while having no effect on their willingness to approve mortgages easy to sell (non-jumbos).Should Every Bank have One Synthetic Arbitrage .The Gateway to Synthetic Securitisation. By extension. but also as an engine for change in economies that are seeking to modernize 30 . In this respect.Repackaging Funds of Hedge Funds. securitization has weakened the link from bank funding conditions to credit supply in aggregate. Loutskina .Strahan (2006) showed that securitization reduces the influence of bank financial condition on loan supply. we find that the use of securitisation appears to shelter banks’ loan supply from the effects of monetary policy. Credit Derivatives .role of banks from “originate and hold” to “originate. the recent experience of the sub-prime mortgage loans crisis is very instructive. repackage and sell” has also modified banks’ abilities to grant credit and the effectiveness of the bank lending channel of monetary policy. Sud (2008) said Securitization is a form of off-balance sheet financing that is increasingly being used in the EBRD's countries of operations.

This article reviews the development of the securitisation market in Russia. Biswas (2008) said Unorganized manufacturing sector of India is operating under increasing returns to scale despite the industries being predominantly traditional in nature. informal financing ensures most productive use of scarce resource. Thus. not only restrict supply of loans to this sector but also fail to ensure productive use of the capital advanced to this sector. which is reflected in terms highlighted>terms of increasing returns to scale. timely delivery and effective monitoring but also ensure proper use of the fund and thus safe 31 . Low-cost funding and increased balance-sheet liquidity raise bank willingness to approve mortgages that are hard to sell (jumbo mortgages). It is argued that in order to provide adequate finances to these industries terms highlighted>banks may operate through these informal institutions that would not only ensure proper screening. By extension. Scarcity of capital compels this sector to operate at a sub-optimal level. while having no effect on their willingness to approve mortgages easy to sell (non-jumbos). Significantly positive regression coefficient of the value added per enterprise on the proportion of non-institutional finances in total outstanding loan and a negative coefficient of the regression on the share of institutional finances are again manifestation of the differences in the utilization of the finances and the quality of financial services provided by the two sources. thereby mitigating the real effects of monetary policy. Informal sources of financing is highly important to this sector and these financers having full information about borrowers are in a position to monitor the functioning of the latter often bundling of financing with other relations and at times through equity participation. Scheduled commercial terms highlighted>banks plagued with NPAs under directed lending primarily due information asymmetry and monitoring problems. Thus. the increasing depth of the mortgage secondary market fostered by securitization has reduced the impact of local funding shocks on credit supply. securitization has weakened the link from bank funding conditions to credit supply in aggregate. Biswas. Loutskina and Strahan (2006) showed securitization reduces the influence of bank financial condition on loan supply. the efforts that have been made to improve the legal framework and the challenges that still remain.their infrastructure.

the data for the domestic banks fit well the aforementioned portfolio-choice model. Our results indicate that. Sumon Bhaumik. mean and standard deviation. but the model cannot explain the behaviors of foreign banks. India. In general.repayment for the bank. we examine banks' behavior in the context of credit markets of an emerging market economy. In this article the author explores the role which legal regulation plays in financial innovation by using the example of securitisation. These results have implications for disbursal of credit to small and medium enterprises in India. In the first part. Ramsay (1993) said inancial innovation has both social and economic benefits it is necessary to understand the factors which facilitate or impede financial innovation. allocation of assets between risk-free government securities and risky credit is affected by past allocation patterns. risk averseness of banks. and Piesse (2008) discussed about the relationship between ownership and financial performance of banks in emerging markets. By reviewing the history of securitisation in Australia. in India. regulations regarding treatment of NPA.Vashisht and Bansal (2009) conducted to analyze and compare the performance (in terms of loan disbursement and non. 32 . It would thus provide a good opportunity to terms highlighted>banks to do business with a vast sector of the economy. it is demonstrated that legal regulation has both hindered and promoted financial innovation. bank-wise as well as year-wise comparisons are done with the help of Compound Annual Growth Rate (CAGR).performing assets) of credit schemes of selected banks for the last five years. Arora . A positive relationship is also found between total loan disbursement and total Non-Performing Assets Outstanding (NPA O/S) of selected banks. especially for private banks. and in the second part. namely. and ability of banks to recover doubtful credit. stock exchange listing (for private banks). a positive relationship is found between total loan disbursement and total NPA O/S of selected banks with the help of a correlation technique. This paper is divided into two parts. literature about cross-ownership differences in credit market behavior of banks in emerging economies is sparse. It is also evident that banks deal with changing levels of systematic risk by altering the ratio of securitized to non-securitized credit. Using banklevel data from India and a portfolio-choice model for nine years (1995-96 to 2003-04).

The study reveals that the profitability position was reasonable during the period of study when compared with the previous years. What is stressed in this article is the pressing need of the small-scale entrepreneur for becoming aware and educated in modern business management holding a professional attitude toward rational decision-making and banks have to facilitate that process as a part of the credit policy sold by them. though at one point of time it was very high.Singla (2008) examined how financial management plays a crucial role in the growth of banking. 33 . In this paper we build a model of asymmetric information in the secondary market for loans and a `lemons' problem faced by uninformed agents who buy these loans. Although the secondary loan market delivers welfare increases it is also unstable. it was evident that the companies were maintaining 1:1 ratio. It is concerned with examining the profitability position of the selected sixteen banks (BANKEX-based) for a period of five years (2000-01 to 2006-2007). it was observed that the return on net worth had a negative correlation with the debt equity ratio. Interest income to working funds also had a negative association with interest coverage ratio and the Non-Performing Assets (NPA) to net advances was negatively correlated with interest coverage ratio Sowerbutts (2009) examined a simple model to look at the elect of securitization on the banking system. Interest coverage ratio was continuously increasing. which indicated the company's ability to meet the interest obligations. but only when other investment opportunities are good. With respect to debt equity position. Das (2002) tried to seek a solution to the problem of NPA in the small scale industries under the present circumstances of banking and insurance working together under the same roof. We show how the emergence of secondary markets can lead not only to a fundamental increase in asset prices but also to a change in return correlations from negative to positive across asset classes. Return on Investment proved that the overall profitability and the position of selected banks were sustained at a moderate rate. Capital adequacy ratio was constant over a period of time. We show how certain conditions can sustain a secondary loan market even when banks have inside information about their borrowers. During the study period.

A positive responds is seen in the field of enhancing the role of market forces. of India and the Central Bank of India (i. the paper will try to study the major impacts of those reforms upon the banking industry. The results show that the observed private sector commercial banks have higher mean technical efficiency score compared to those of the public sector commercial banks. But at the same time the reform has failed to bring up a banking system which is at par with the international level and still the Indian banking sector is mainly controlled by 34 .e. Out of the 28 observed commercial banks considered for the study. versatile. most of the observed commercial banks exhibit decreasing returns to scale for the period under observation.Sinha (2008) initiated a system of Prompt Corrective Action (PCA) with various trigger points and mandatory and discretionary responses by the supervising authority on a real time basis. The reforms were aimed at to make the Indian banking industry more competitive. Reserve Bank of India) during the last fifteen years. Capital-To-Risk-Weighted Assets Ratio (CRAR) and Return on Assets (ROA). Secondly. Kalita (2008) started as a follow up measures of the economic liberalization and financial sector reforms in the country. The present paper seeks to combine the ratio approach adopted by the Reserve Bank of India with the Assurance Region based measure of technical efficiency to find out a composite Data Envelopment Analysis (DEA) based efficiency indicator of 28 observed commercial banks for 2002-03 to 2004-05. The PCA framework relies on three major indicators of banking sector performance: Net Non Performing Asset (NPA). to follow international accounting standard and to free from the government's control. productive. The banking sector being the life line of the economy was treated with utmost importance in the financial sector reforms. regarding prudential regulations norms. reduction of NPAs and regarding the up gradation of technology. introduction of CAMELS supervisory rating system. Finally. six were found to be efficient. efficient. The reforms in the banking industry started in the early 1990s have been continued till now. A study of the technical efficiency scores across ownership groups reveal that the observed private sector banks have higher mean technical efficiency scores compared to their public sector counterparts. The paper makes an effort to first gather the major reforms measures and policies regarding the banking industry by the govt.

Ali (2000) said Credit derivatives are transforming the ways in which banks and other financial institutions manage credit risk. In particular. such as loan syndications. we do not engage in a profound analysis of the benefits and drawbacks implicated in the new securitization framework. This article explains the legal structure of the main types of credit derivatives (credit default swaps. Parties who deal in or advise on futures contracts are subject to licensing requirements. futures contracts can only.the govt. We argue that regulatory disregard of these issues does not only destabilizes securitization markets but also induce profound disruptions to mutual payment obligations of financial intermediaries. risk participations and conventional asset-backed securitizations. We carefully highlight the pathology of the new "securitisation framework" to facilitate a general understanding of what constitutes the current state of computing adequate capital requirements for securities credit exposures. credit spread products. After a brief presentation of the nature of securitisation per se. credit derivatives permit financial institutions to unbundle and separately lay-off the credit risk on their loan and bond portfolios and trading books. and credit-linked notes) and examines the key regulatory issues facing credit derivatives in Australia. we introduce both theoretical considerations and empirical observations to identify possible sources of systemic risk in loan securitisation. total rate of return swaps. The first of these issues relates to the status of credit derivatives under the Australian Corporations Law. as public sector banks being the leader in all the spheres of the banking network in the country. we focus on asymmetric information and the security design as determined by the tradability of credit risk transfer. that is whether such derivatives are "futures contracts". under the 35 . Jobst (2003) established an intrinsic connection between asset securitisation and financial market stability in the light of altered financial intermediation. In addition. Although we incorporate a simplified sensitivity analysis of the varying levels of capital charges depending on the security design of asset securitisation transactions. Jobst (2004) provided a comprehensive overview of the gradual evolution of the supervisory policy adopted by the Basle Committee for the regulatory treatment of asset securitisation. In contrast to traditional methods of credit risk management.

Securitization may help Indian Banks reduce their regulatory.Corporations Law. Finally. be formally authorized to do so by the Australian Prudential Regulation Authority. A party that breaches this requirement will be subject to criminal penalties. non-compliance with these licensing requirements will attract civil as well as criminal penalties. Parties. Again. it is likely that. be transacted on a futures exchange or in a specifically exempted futures market. that a dealer in credit derivatives will be considered to be conducting an insurance business. if the reforms proposed in the Financial Services Reform Bill 2000. in these circumstances. converted into tradable securities and sold to third party investors. While Securitization serves as a powerful tool of financial reengineering. the credit derivatives transacted by the dealer will be unenforceable. The question of whether a credit derivative (or any other derivative) is a "futures contract" will. striking a securitization deal is not that simple. complexity and 36 . consequently. parties who conduct markets in financial products will be required to hold a new financial product market license. under the Australian Insurance Act 1973. Failure to comply with these requirements attracts both civil and criminal penalties. are enacted be superseded by the question of whether a credit derivative is a "financial product". The status of a credit derivative as a futures contract or a financial product also has significant implications for the application of the Australian gaming and wagering legislation.3 Rationale Securitisation is the process of conversion of existing assets or future cash flows into marketable securities Banks can securitise the loans they have given out and use the money brought in by this to give out more credit. This protection has also been extended to financial products under the Financial Services Reform Bill. 1. It is a process through which illiquid assets are packaged. In addition. and sometimes economic and capital requirements. there is a concern that credit derivatives are contracts of insurance under Australian law and. who carry on an insurance business in Australia. Futures contracts enjoy the benefit of a statutory safe harbor from that legislation. A party who deals in or advises on financial products will be subject to licensing requirements. Securitization has arrived in a developing country like India much faster than expected. In addition. It involves substantial costs. must.

Sample elements: The sampling element were the securitized asset. public and private banks.2.1 The study The study was descriptive in nature 2. The market for securitization of loans is growing very fast . To evaluate the impact of securitization on the Management efficiencies of the private 2. The study will be focused that the profitability position of the banks will be improve after the process of securitization or not and also compare with the previous years. earning per share. To evaluate the impact of securitization on the Liquidity of the public and private banks. Research methodology 2. Securitization reduces the influence of bank financial condition on loan supply.1 2. net operating profit. To compare Mnagemnt efficiencies before and after securitization of public and private banks. To compare liquidity before and after securitization of public and private banks.4 Objectives of the study 1.a longer time period to complete it.2. Sample size: 15 banks(five private and ten public).4 Sampling techniques : Purposive sampling techniques was applied 37 .2. 1.2 Sample design 2.2. 6.It is the beneficial for the banks. 3. before and after securitization of public and private banks. return on net capital and dividend yield ratio of individual bank. 4. To compare profitability.2 Population: The total population wear all the public and private banks. 5. 2. To evaluate the impact of securitization on the profitability of the public and banks.3 2.

return on net capital and dividend yield as dependent variable and U-Test were applied to check the before and after effect of securitization. Results of regression Public sector banks 38 .4 Tools used for data analysis: Simple linear regression was applied between securitized assets as an independent variable and net operating profit.3 Tools used for data collection: The data were collected through the websites of different bank and moneycontrol.2. earning per share.com 2.

589 -.064 -.851) indicates significant relationship between the securitization of NPA and return on net worth of public sector banks.2 % 35.616 5.783+ (-.115+0.725 . The beta value (-.Hypothesis Banks(public) RATIO R.735 1.330 Significance Level 0.9 % Insignificant .674) NPA CR= 0. The findings indicate that at 5 percent level of significance (t = -4.Square .458+ (-.379 2.931 -.5 % Insignificant . significant Insignificant .109 H01 H02 H03 H04 H05 H06 RETURN ON NET WORTH EARNING PER SHARE NET PROFIT MARGIN RETURN ON ASSETS CURRENT RATIO ASSETS TURNOVER RATIO CAPITAL TURNOVER RATIO TOTAL INCOME/CAP ITAL EMPLOYED tvalue 4.3 significant H08 .007) NPA CTR =1.037+ (-.420 2.026) NPA EPS= 321.648 4.8 Insignificant H07 . Results of 39 . 459+0.313 37.0 % Insignificant .325 1.988 Beta -.002) NPA TI/CM= .595) NPA NPM= 11.570 8. Significant at 0.000 NPA ATA= 5.000 NPA Results Sig.119 1.633+ (-.558 -.5 significant Ho1:-There is no relationship between securitization of NPA and Return on net worth of Public sector banks.851 -.2% Regression Equation RNW= 20.212 -.650+ (-.007) NPA ROA =1342.409 -./insig.589.2%) the null hypothesis is rejected.540 3.098 -.419+ (-3.483 33.962 .

The findings indicate that at 5 percent level of significance (t = -1.2%) the null hypothesis is Accepted.931.483) indicates significant relationship between the securitization of NPA and Net profit margin of public sector banks.570) indicates significant relationship 40 .962. The beta value (.313) indicates significant relationship between the securitization of NPA and return on assets of public sector banks. The beta value (-. securitization of NPA effect the return on net worth of Public sector banks. securitization of NPA does not effect the net profit margin of Public sector banks. securitization of NPA does not effect the earning per share of Public sector banks.9%) the null hypothesis is Accepted. Significant at 35.330) indicates significant relationship between the securitization of NPA and earning per share of public sector banks. The findings indicate that at 5 percent level of significance (t = -.558. The beta value (-. The findings indicate that at 5 percent level of significance (t = 1. Ho2:-There is no relationship between securitization of NPA and Earning per share of Public sector banks. Ho3:-There is no relationship between securitization of NPA and Net profit margin of Public sector banks.988.5%) the null hypothesis is Accepted. Significant at 37. Significant at 33%) the null hypothesis is Accepted. The beta value (-. Ho5:-There is no relationship between securitization of NPA and current ratio of Public sector banks. Results of the linear regressions clearly show that. Significant at 8. The findings indicate that at 5 percent level of significance (t = -. Ho4:-There is no relationship between securitization of NPA and return on assets of Public sector banks. securitization of NPA does not effect the return on assets of Public sector banks.the linear regressions clearly show that. Results of the linear regressions clearly show that. Results of the linear regressions clearly show that.

648) indicates significant relationship between the securitization of NPA and Assets turnover ratio of public sector banks.between the securitization of NPA and current ratio of public sector banks. The findings indicate that at 5 percent level of significance (t = -2.064. Significant at 5. The beta value (-. Significant at 1. The beta value (. securitization of NPA does not effect the assets turnover ratio of Public sector banks. securitization of NPA effect the assets turnover ratio of Public sector banks. Ho7:-There is no relationship between securitization of NPA and capital turnover ratio of Public sector banks. Ho6:-There is no relationship between securitization of NPA and assets turnover ratio of Public sector banks. Results of the linear regressions clearly show that. Results of the linear regressions clearly show that.735) indicates significant relationship between the securitization of NPA and Total income/capital employed of public sector banks.212. The findings indicate that at 5 percent level of significance (t = -2. The beta value (-. securitization of NPA does not effect the current ratio of Public sector banks. Ho8:-There is no relationship between securitization of NPA and Total income/capital employed ratio of Public sector banks.8 %) the null hypothesis is Accepted. Significant at 4. Results of the linear regression clearly show that. 41 . The findings indicate that at 5 percent level of significance (t =-3.616) indicates significant relationship between the securitization of NPA and Assets turnover ratio of public sector banks.5%) the null hypothesis is rejected. Results of the linear regressions clearly show that.3 %) the null hypothesis is rejected.409. securitization of NPA effect the total income/capital employed of Public sector banks.

42 .

0% NPA TI/CE 0.309 .3% Regression Equation RNW 7.00 3 99.422 -1.153) indicates significant relationship between the securitization of NPA and return on net worth of private sector banks.153 Beta Significan ce Level 77.870+0.000 0.343+5.146E-5) NPA ant . Significant at 77.710 -.2% . The beta value (.140+0.6% NPA ATR 4.Insignific 5.396 1.147 .Private Banks Ho1:-There is no relationship between securitization of NPA and Return on net worth Hypothe sis H01 RATIO R.392 .0% . The findings indicate that at 5 percent level of significance (t = -.62 9 -.3%) the null hypothesis is accepted. Results 43 Results Sig.650 16.384 45.309. Insignific ant Insignific ant Insignific ant Insignific ant Insignific ant Insignific ant Insignific ant .1% .881E6 NPA CTR 1.702+0.192 71.183+0.Squa re Return On Net .023 Worth H02 Earning Per Share H03 Net Profit Margin H04 Return On Assets H05 Current Ratio .831 .403+0.000 .037 -.366+(.000 H06 Assets Turnover Ratio H07 Capital Turnover Ratio H08 Total Income/Capita l Employed of Private sector banks.474 -.231 66.053 -.006 0.216 68.443 .113 NPA CR 0.002 NPA ROA 113.3% Tvalue .5% 18.010 NPA NPM 7.619 0.047 ./insig.398+.002 NPA EPS 15.

Ho3:-There is no relationship between securitization of NPA and Net profit margin of Private sector banks.619. Significant at 18.831. The beta value (. Significant at 45. The beta value (.216) indicates significant relationship between the securitization of NPA and Net profit margin of private sector banks.1%) the null hypothesis is Accepted.443. Ho4:-There is no relationship between securitization of NPA and return on assets of Private sector banks. securitization of NPA does not effect the earning per share of Private sector banks.629) indicates significant relationship between the securitization of NPA and return on assets of private sector banks. Ho5:-There is no relationship between securitization of NPA and current ratio of Private sector banks. securitization of NPA does not effect the return on assets of Private sector banks.1%) the null hypothesis is Accepted.392. Results of the linear regressions clearly show that. securitization of NPA does not effect the net profit margin of Private sector banks.192) indicates significant relationship 44 . The beta value (0. The findings indicate that at 5 percent level of significance (t = . Results of the linear regressions clearly show that. Significant at 68%) the null hypothesis is Accepted.3%) the null hypothesis is Accepted. The findings indicate that at 5 percent level of significance (t = -. The beta value (-. securitization of NPA does not effect the return on net worth of Private sector banks. The findings indicate that at 5 percent level of significance (t = -. Results of the linear regressions clearly show that.384) indicates significant relationship between the securitization of NPA and earning per share of private sector banks. Ho2:-There is no relationship between securitization of NPA and Earning per share of Private sector banks.of the linear regressions clearly show that. Significant at 18. The findings indicate that at 5 percent level of significance (t = 1.

securitization of NPA does not effect the assets turnover ratio of Private sector banks. The findings indicate that at 5 percent level of significance (t = -1. Results of the linear regressions clearly show that. 45 . Significant at 66%) the null hypothesis is accepted. securitization of NPA does not effect the current ratio of Private sector banks. Significant at 99. The beta value (-. The findings indicate that at 5 percent level of significance (t = 0.6 %) the null hypothesis is Accepted. Significant at 16. Results of the linear regressions clearly show that. Results of the linear regression clearly show that.006. Results of the linear regressions clearly show that. The findings indicate that at 5 percent level of significance (t = -474.231) indicates significant relationship between the securitization of NPA and Total income/capital employed of private sector banks.003) indicates significant relationship between the securitization of NPA and Assets turnover ratio of private sector banks. Ho7:-There is no relationship between securitization of NPA and capital turnover ratio of Private sector banks.650) indicates significant relationship between the securitization of NPA and Assets turnover ratio of private sector banks.between the securitization of NPA and current ratio of private sector banks.2 %) the null hypothesis is accepted.710. securitization of NPA does not effect the assets turnover ratio of Private sector banks. The beta value (-. securitization of NPA does not effect the total income/capital employed of Private sector banks. Ho6:-There is no relationship between securitization of NPA and assets turnover ratio of Private sector banks. The beta value (0. Ho8:-There is no relationship between securitization of NPA and Total Income/Capital Employed ratio of Private sector banks.

Results of U-Test 46 .

6 4.3 79.2 47 .041 .907 . H01 H02 H03 H04 H05 H06 H07 H08 significant Insignificant Insignificant significant Insignificant significant significant significant 2./insig.Public sector banks Hypothesis Banks(Public) RATIO Return On Net Worth Earning Per Share Net Profit Margin Return On Assets Current Ratio Assets Turnover Ratio Capital Turnover Ratio Total Income/Capital Employed z-value 2.1 00.948 0.646 .7% 39.3 97.343 Significance Level 0.9 Results Sig.302 2.0 1.076 3.074 2.

securitization of NPA does not effect the earning per share of Public sector banks.6% level of significance the null hypothesis is Accepted. The findings clearly show that. The results of the U-Test (z=. The results of the U-Test (z= . Ho2:-There is no relationship between securitization of NPA and Earning per share of Public sector banks.Public sector banks Ho1:-There is no relationship between securitization of NPA and Return on net worth of Public sector banks. The results of the U-Test(z=-2. The findings clearly show that.302) indicate that at 79.7% level of significance the null hypothesis is rejected.64) indicate that at 0. securitization of NPA effect the return on net worth of Public sector banks.907) indicate that at 39. 48 . securitization of NPA does not effect the net profit margin of Public sector banks. The findings clearly show that. Ho3:-There is no relationship between securitization of NPA and Net profit margin of Public sector banks.3% level of significance the null hypothesis is Accepted.

The findings clearly show that. securitization of NPA effect the assets turnover ratio of Public sector banks.343) indicate that at 1.0% level of significance the null hypothesis is Rejected.064) indicate that at 0.3% level of significance the null hypothesis is rejected. Ho6:-There is no relationship between securitization of NPA and assets turnover ratio of Public sector banks. The results of the U-Test (z= . The findings clearly show that. securitization of NPA does not effect the current ratio of Public sector banks. Ho7:-There is no relationship between securitization of NPA and capital turnover ratio of Public sector banks.076) indicate that at 97. The findings clearly show that.9% level of significance the null hypothesis is rejected. The findings clearly show that. The results of the U-Test (z=2.041) indicate that at 4. securitization of NPA effect the assets turnover ratio of Public sector banks.1% level of significance the null hypothesis is Accepted. Ho5:-There is no relationship between securitization of NPA and current ratio of Public sector banks. The results of the U-Test (z= 2.Ho4:-There is no relationship between securitization of NPA and return on assets of Public sector banks. Ho8:-There is no relationship between securitization of NPA and Total Income/Capital Employed ratio of Public sector banks. 49 . securitization of NPA effect the return on assets of Public sector banks. The results of the U-Test (z=3.

281 .2% level of significance the null hypothesis is rejected.0 48.7 4.9 12.082 1.948) indicate that at 0.801 Significance Level 48.643 .6 93. The findings clearly show that.9 69./insig.801 Significant Insignificant Insignificant 50 .480 .1 24. securitization of NPA effect the total income/capital employed of Public sector banks.5 Results Sig. Insignificant Insignificant Insignificant Insignificant Insignificant H01 H02 H03 H04 H05 H06 H07 H08 Return On Net Worth Earning Per Share Net Profit Margin Return On Assets Current Ratio Assets Turnover Ratio Capital Turnover Ratio Total Income/Capital Employed . Private sector banks Hypothesis Banks(Public) RATIO z-value .160 2.480 1.The results of the U-Test (z=2.5 69.

9% level of significance the null hypothesis is Accepted. The results of the U-Test (z=. Ho4:-There is no relationship between securitization of NPA and return on assets of Private sector banks.480) indicate that at 69.9% level of significance the null hypothesis is Accepted. The findings clearly show that. Ho2:-There is no relationship between securitization of NPA and Earning per share of Private sector banks. Ho3:-There is no relationship between securitization of NPA and Net profit margin of Private sector banks. The results of the U-Test (z=.5% level of significance the null hypothesis is accepted. securitization of NPA does not effect the earning per share of Private sector banks.801) indicate that at 48. securitization of NPA does not effect the return on net worth of Private sector banks. The findings clearly show that.Private sector banks Ho1:-There is no relationship between securitization of NPA and Return on net worth of Private sector banks. securitization of NPA does not effect the net profit margin of Private sector banks. The results of the U-Test (z= . 51 . The findings clearly show that.480) indicate that at 69.

The study is beneficial for all the public and private banks who want to securitize The study is helpful for further research. The findings clearly show that.The results of the U-Test (z=1. Ho6:-There is no relationship between securitization of NPA and assets turnover ratio of Private sector banks. The results of the U-Test (z=. 2. . The study helpful for the investor. The findings clearly show that.082) indicate that at 4. 3. Results of the linear regressions clearly show that. The results of the U-Test (z=1. securitization of NPA does not effect the return on assets of Private sector banks.1% level of significance the null hypothesis is Rejected.160) indicate that at 93. The study is helpful for RBI.801) indicate that at 48. securitization of NPA does not effect the assets turnover ratio of Private sector banks. The findings clearly show that. securitization of NPA does not effect the total income/capital employed of Private sector banks.7% level of significance the null hypothesis is Accepted. The results of the U-Test (z=2. The results of the U-Test (z=. 4. securitization of NPA effect the assets turnover ratio of Private sector banks. The findings clearly show that.281) indicate that at 24% level of significance the null hypothesis is accepted.6% level of significance the null hypothesis is Accepted.643) indicate that at 12.5% level of significance the null hypothesis is accepted. Who wants to invest in banking sector. Ho8:-There is no relationship between securitization of NPA and TOTAL Income/Capital Employed ratio of Private sector banks. securitization of NPA does not effect the current ratio of Private sector banks. Ho5:-There is no relationship between securitization of NPA and current ratio of Private sector banks. 52 there assets. Ho7:-There is no relationship between securitization of NPA and capital turnover ratio of Private sector banks. Implication 1.

A multinational study can be conducted to check the effect of securitization on the Some other factor can also be taken which effect the securitization process of performance of banks. first chapter includes introduction and it is subdivided into conceptual framework. 2. in literature review all researches which have been done previously in the related field is included. Summary The study has been divided into five parts. banks.Suggestion 1. In conceptual framework all definitions and introduction about the topic is included. rationale is the need 53 . Some other major can be taken to evaluate the performance of banks. rationale and objectives. 3. 4. The time period can be increase for further study. literature review.

next is sample design which includes population. in the end references and annexure. Fifth chapter is the summary and conclusion. Then. Third chapter is the results and discussion. and private. Fourth chapter includes implications and suggestions. The NPAs are considered as an important parameter to judge the performance and financial health of banks. total income/capital employed effect the public sector banks and there were no effect of securitization on the private sector banks. In the study I have specified which type of study is this. assets turnover ratio. like this one is a descriptive study and methodology used in this through secondary data. which includes the results of the ratios and output of SPSS software. return on assets. then linear regression is applied to check the significance level . sample element. which include the study.e. sampling technique and sample size.and hypothesis was prepared . why we have done this research. The Regression results of the study showed that securitization process effect the Return on net worth. tools used for data collection and tools used for data analysis. comes tools used for data collection. Second chapter is research methodology.of the study. The results of the U-test results showed that securitization of NPA effect the return on net worth. various websites were used for data collection. Then. This study analyzed the impact of securitization of Non-Performing Assets (NPAs) on the performance of public. the tools used for data analysis shows which type of tests has been applied in this study. sample design. Conclusion Securitization is the process of conversion of existing assets or future cash flows into marketable securities. the objectives include all the objectives of carrying out the research. Securitization of NPA does not affect the private sector banks. 54 . total income / capital employed in public sector banks. like in this research first of all eight different ratios was computed. capital turnover ratio. capital turnover ratio. i. banks in India.