Securitization Market in India

Securitization issuance in emerging

markets
Country Issuance in $bn Country Issuance in $bn Country Issuance in $bn

Asia Latin America EEMEA

Taiwan 1.9 Brazil 4.8 Turkey 4.5

South Korea 26 Mexico 4.3 South Africa 2.2
India 6.67 Argentina 1.5 Egypt 1.7
Singapore 1.2 Chile 0.9 Russia 0
Malaysia 0.4 Peru 0.7 Others 0.2
Indonesia 0.6 Columbia 0.5
Japan 81 Others 1.3
Asia 117.77 Latin 14 EEMEA 8.6
America

Emerging markets total $ 53 bn in 2005.

 Securitization issuance in emerging
markets
Securitization issuance in emerging markets

30
25
Issuance ($bn)

20
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The three stages of securitization in India

† The early years

† The growth phase

† The new era

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

1992 2000 2001 2002 2004 2006

First offshore transaction First revolving

First securitization backed by aircraft securitization involving
including property purchase receivables working capital facilities
receivables
The early years
The Growth Phase The new era
The three stages of securitization in India

… Securitization began with the sale of consumer loan pools.

… Originators directly sold loans to buyers.

… Originators acted as servicers and collected installmenst due

on the loans.

… Creation of transferable securities backed by pool receivables

(known as PTCs) became common in late 1990s.
The three stages of securitization in India

… In 1990s, there were only six or seven issuances per year.

… Average issue size was about Rs.450 million.

… The volume of issuances grew exponentially beginning in

2000 due to rapid growth of consumer finance.

… Investors acceptance of securitized instruments also

improved.
The three stages of securitization in India

… There were approximately 75 issuances each year.

… Average issue size was about Rs.1900 million.

… There was pressure on the resources of large originators due

to continued growth in consumer credit.

… From 2004 to 2005, 40% of vehicle finance was funded

through ABS backed by auto loans.
The three stages of securitization in India

… The growth of debt funds, the largest investors in securitized

paper, also supported the expansion of the market .

… Citibank completed India's first revolving securitisation

issuance for its small and medium enterprises working capital
loans in 2004.

… The fixed rate issuance of Rs 50 crore comprised two series

of pass through certificates with bullet maturity of two years.

… Strong performance and higher yields also attracted investors.

Growth of Indian Securitization Market

Growth of Indian SF market

375 150
127
Value in Rs Billion

300 120
90
225 90
75
150 60
25 30
75

0 0
2002 2003 2004 2005
Values Number of Deals
Source: ICRA rating Feature
 The Indian Securitization Market

Securitization market volumes

350
300 Collateralized Loan
Rs in Billions

250 Obligations
200 Mortgage Backed
150 Securities
100
50 Asset Backed
0 Securities

002 003 004 005 006

0 1-2 0 2-2 0 3-2 0 4-2 0 5-2
20 20 20 20 20
Source CRISIL
 Product Wise Growth Pattern of Indian
Securitization Market
250

200
Volumes (Rs in bn)

150

100

50

0
2002 2003 2004 2005 2006

ABS MBS CDO PG Others

Source: ICRA report
Milestones in the growth of Securitization
market in India
‰ The first deal in India was in 1992 when Citibank securitized auto
loans and placed a paper with GIC mutual fund worth about Rs. 16
Crores.

‰ In 1994-95, SBI Caps structured an innovative deal where a pool of

future cash flows of high value customers of RSIDC were
securitized.

‰ ICICI had securitized assets to the tune of Rs.2,750 crore in its

books as at end March 1999.

‰ Another novel move was by Maharashtra government to securitize

sales tax. The Maharashtra Vikrikar Rokhe Pradhikaran (MVRP) is
the SPV to undertake this first of its kind transaction in the country.
Milestones in the growth of Securitization
market in India
† Securitization of rated transactions increased
from less than Rs.1,000crore in 1998, to over
Rs.30,000 crore in 2004 – 05. (Rs.1 crore =
Rs.10 million).

† An oil monetization deal has been structured

where the future flows of oil receivables
accruing to a company were securitized.
Milestones in the growth of Securitization
market in India
† L&T has securitized lease receivables even before a power
plant was completed.

… This has opened a new vista for financing power projects.

… This securitization deal financed even the assets to be created

in future.

… The National Housing Bank (NHB) has made efforts to

structure the pilot issue of mortgage backed securities (MBS).
 Characteristics of Securitization market in
India
† High concentration of originators.

… Number of originators was less than 5 in 2000, and

has become more than 20 in 2005.

… The top five originators account for 90% of the

issuance volume.

… Banks have not yet adopted securitization because of

regulatory concerns.
 Characteristics of Securitization market in
India
… Preference for highest rated tranches.

… Focus is on the short end of the maturity.

… Investors appetite is restricted to senior tranches that

carry the highest ratings – AAA / P1+.

… Originators retain the junior tranches as unrated paper.

Characteristics of Securitization market in
India
… Bond like characteristics of PTCs.

… PTCs are structured to have a predetermined schedule

of monthly interest and principal payments to be paid
on timely basis.

… The structure in international market is different

where interest is paid on a timely basis and principal
is repaid according to instrument maturity.
Characteristics of Securitization market in
India
… High level of credit enhancement compared to
international norms.

… Enhancement in the form of overcollateral, etc.

cover credit losses.

… Timing mismatches due to delayed collection are

also covered.

… Bond-like outflows coupled with volatile inflows

require high enhancement levels.
Characteristics of Securitization market in
India
† Domination of ABS.

… Securitization has a 100% compounded annual growth rate, of

which ABS accounts for over two-thirds of issuances.

… The growth of MBS was hindered by the low investor appetite

for longer tenor assets.

… CDOs have also not taken off as they are unattractive to the
originators due to high level of credit enhancement needed.
 Past Trends in Indian Securitization
market
† Routing the transaction through an SPV yet to gain popularity.

† Absence of active secondary market for securitized debt.

† The market was till recently unregulated.

† Lacked transparency in volume, price, parties to the

transaction, etc.
 Past Trends in Indian Securitization
market
† Most deals in the past involved:

… The transfer of beneficial interest on the asset and not the

legal title.

… The pass-through mechanism.

… An escrow mechanism for payment to the buyer.

… Direct purchases of receivables by financial institutions,

and bigger NBFCs.
 Opportunities in Indian securitization
market
† RBI guidelines on securitization of standard assets have
encouraged originators to look at potential cost effective
solutions for structuring the securitization transactions.

† The third party participation in the transaction is also

encouraged.

† The concept of mezzanine debt, and repackaged PTCs which

are already prevalent in global structured finance market can
be adopted in India now.
ABS: Distribution by Asset Class
ABS : Distribution by asset class

Cars
Construction equipments
Utility Vehicle
Others
Two wheelers
Personal loan
Growth of the Indian ABS Market
250 10

8
200
Value in Rs Billion

6
150

4
100

2
50

0
0
2002 2003 2004 2005

Value Average deal size

 Prepayment trends in ABS in India
† Prepayment rates vary significantly across asset classes as the highest
is in personal loans (PL), and lowest is commercial vehicles (CVs).

† Established prepayment trends are changing for e.g. prepayment rates

in CV pools are increasing though it still remains the lowest whereas
prepayment rates in most other asset classes are declining.

† Repossession driven prepayment are increasing in importance like in

CVs.

† Prepayment effects pool duration, especially in PL pools.

 Mortgage Backed Securitization in India
† MBS has potential for high growth as:

… There is significant expansion in housing finance.

… The largest ever transaction of MBS in India was

Rs.12 billion mortgage backed pool of ICICI Bank.
 Credit Enhancement
† Credit enhancement utilization

Minimum 0.58%
Maximum 2.01%
Median 0.85%
† Barring two transactions, the utilisation has been within
10% of the available level.
 Hurdles in the growth of MBS in India
† Long tenure of MBS paper together with the lack of
secondary market liquidity.

† Unlike retail vehicle loans, home loans in India either get re-
priced or prepaid, which exposes the structure to significant
prepayment / interest rate risk, thus leading to requirement of
higher credit enhancement.

† The presence of fixed rate PTCs backed by virtually floating

rate loans is another hurdle.
 Growth of MBS Market in India
40 16

12
Values in Rs Billion

30

8
20

4
10

0
0
2002 2003 2004 2005
Value Number of Transactions
Classification or Tranches
Tranche Credit
† Senior rating
† Subordinated Senior notes 'AAA/Aaa'

† Mezzanine
Mezzanine and Notes
† Equity notes lower 'Ba/BB'
subordinated
Equity 'Un-rated'
 Mezzanine PTCs in the Indian market
† Mezzanine debt can be applied to any securitization transaction
including ABS, MBS, and CDOs.

† Retail ABS can be a preferred option due to less volatile and

more predictable performance.

† CDOs are also a gainful option because the underlying default

statistics used for structuring CDOs are highly robust and
reliable.
 Scope of Mezzanine Tranching

Capital Structure of Traditional Capital Structure of securitization

Indian Securitization trust trust with mezzanine trust

Senior PTC Senior PTC

Total Total
Capitalization Capitalization
100% 100%
Mezzanine PTCs

Equity Equity
 Impact of introduction of Mezzanine
PTCs in the Indian market
† The Mezzanine PTCs will address the capital pressure
originators face, which will help revitalize the market.

† The public sector banks, which account for three-fourth of the

assets of the banking sector, are likely to adopt securitization.

† In case of upgrades of mezzanine tranches, the investor

stands to gain both in terms of capital provision as well as
mark to market gains / realized capital gains.
 The repackaged PTCs
• Tranching post repack

Originally Senior repackaged

stipulated PTCs
second loss
Mezzanine tranche =
now required second loss
Originally
stipulated Equity= now required
first loss first loss
Pre repack Post repack
 The repackaged PTCs
† The process of repackaging results in:

… New set of investors providing the credit enhancement; hence

no lowering of credit support to the investors in underlying
transactions as the overall credit enhancement remains same.

… Reduced originator involvement as part of his original

investments are being divested.

… Enhanced third party participation with aligned risk and

return.
 ABS Sectors in the USA
500
ABS issuance in 2005 in

400

300
$bn

200

100

0
Sectors
$bn
Home equity Credit card Auto
Student loan Other Private ABS
Source the Bond market association
 Issuance of mortgage backed securities in
US
2500.0
Issuance in $bn

2000.0
1500.0
1000.0
500.0
0.0
1990 1993 1996 1999 2002 2005

Agency backed CMO Private labled

Source: US Federal agencies
 RBI Guidelines on Securitization
† New guidelines announced by RBI in February 2006.

… True sales requirement, and capital requirement for credit

enhancement have become more stringent.

… The new regulation encourages third party participation in the

transactions.

… Third party enhancement providers now receive preferential

treatment over originators providing the same service.

… The profit arising from sale of assets is to amortized over the life
of instrument.
 Regulatory environment in India for
securitization
† Settlement procedures were not well defined before the new
RBI guidelines issued in February 2006.

† Lack of accounting and valuation norms (Guidance Note now

issued by ICAI)

† Only a few states have relaxed stamp duty levy.

† Taxation issues are yet to be resolved.