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Indian Securitization Market:
A Primer
Vinod Kothari and Abhirup Ghosh
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T
Vinod Kothari he securitization market in India 6) social infrastructure, 7) renewable energy,
is CEO at Vinod Kothari has been in existence since the and 8) others (RBI [2011]). Ambiguities
Consultants P. Ltd., in
early 1990s but it is yet to reach with respect to the tax pass-through treat-
Kolkata, India.
vinod@vinodkothari.com its full potential. The slugging ment of securitization transactions have been
growth of securitization in India is attribut- an obstacle to the market’s growth. However,
A bhirup Ghosh able to the multiple regulatory and taxation that is changing under the 2016 budget law.
is a senior manager at concerns in and around the sector. In the past, investors in the Indian secu-
Vinod Kothari Consultants The securitization market in India ritization market were mostly banks looking
P. Ltd., in Kolkata, India.
abhirup@vinodkothari.com
differs from those of other countries. In con- for assets in the designated priority sectors.
trast to the practice in other countries, even The investor base will likely expand once the
bilateral loan sales are called securitizations tax issues are resolved. Most Indian securi-
in India. India is probably the only country tization transactions are tailor-made to suit
in the world where bilateral loan sales are individual investors’ need. Credit enhance-
called securitizations. Based on the regula- ment levels have been quite high and struc-
tory factors, the market has been choosing tures have been relatively simple. Also, the
pass-through certificate securitization over majority of the transactions do not distin-
direct assignment deals. guish between credit and liquidity support.
The role of regulation in shaping the A distinguishing feature of securitization
market is critical. The Indian securitization in India is that, although market participants
market is largely driven by the need to meet view securitization as a means of access to the
the priority sector targets for banks; therefore, Indian capital markets, most of the instru-
the dependence on demand for priority sector ments issued in Indian securitization transac-
loans is great. Priority sector lending targets tions are unlisted and therefore do not actually
are specific requirements laid down by the facilitate access to India’s securities markets.
Reserve Bank of India (RBI), which require The Indian securitization market grew by
banking institutions to provide a specified 45% in fiscal year 2015–2016. The growth was
portion of their total lending to a few specific primarily attributable to a 51% surge in ABS
sectors. Banks in India are required to direct at issuance volumes. Direct assignments of mort-
least 40% (32% in case of foreign banks having gage loans continued to be popular, while pass-
less than 20 branches) of their total credit to through securitizations of residential mortgage
certain sectors categorized as priority sectors: loans declined to negligible levels. Exhibit 1
1) agriculture, 2) micro and small enterprises, shows selected milestones in the development
3) export credit, 4) education, 5) housing, of the Indian securitization market.
Spring 2017 The Journal of Structured Finance 23

Exhibit 1
Milestones of Indian Securitization
Sources: D&B and ARCIL.
SECURITIZATION STRUCTURES The RBI issued the first set of securitization

PREVALENT IN INDIA guidelines in February 2006 (RBI [2006]). The RBI
issued the guidelines after the market had the oppor-
The Indian securitization market encompasses two tunity to experience the seasoning of the early Indian
broad types of transaction structures: direct assignments securitization transactions. The regulations focused
(DAs) and pass-through certificates (PTCs). PTC secu- largely on PTC securitization transactions. The guide-
ritizations use special purpose vehicles (SPV) to isolate a lines did not address DA securitizations. This produced
transaction’s underlying assets and are generally similar an opportunity for regulatory arbitrage, encouraging
to securitization transactions globally. DA securitiza- issuers to favor the less-regulated DA securitization
tions do not use SPVs and generally take the form of form. The key differences between the DA and PTC
bilateral asset sales. Indian DA securitizations can be routes are shown in Exhibit 2.
viewed as similar to whole loan sales in certain other
jurisdictions.
TYPICAL ORIGINATORS AND INVESTORS
For most of the history of the Indian securitiza-
IN INDIAN SECURITIZATIONS
tion market, banks and other financial institutions have
used DA securitizations for acquiring assets. In fact, The typical originators of securitization transac-
roughly 80% of Indian securitization activity is in the tions include banks, non-banking financial companies
form DA transactions, and such transactions have been (NBFC), housing finance companies, and microfinance
a key feature of the market’s evolution. companies. Priority sector lending requirements
In a PTC securitization, an SPV (often a trust) is are a key motivation for Indian banks to invest in
created to isolate the receivables of the originator into securitizations. Capital relief and portfolio liquidity are
a bankruptcy remote entity, which in turn issues asset- additional motivations for banks (and other potential
backed securities (ABS) to investors. In the nomencla- investors) to invest in securitizations. The investor base
ture of the Indian securitization market, all such deals in the Indian securitization market is currently very
are described primarily as PTCs. This contrasts sharply concentrated. It is important to expand the investor base
with market practices in other jurisdictions, where deals so that securitization serves more purposes than merely
are described primarily by their underlying assets or satisfying priority sector lending requirements.
other characteristics (e.g., residential mortgage-backed Investment in Indian PTC securitizations is lim-
securities [RMBS], commercial asset-backed securities ited to banks, NBFCs, and mutual funds. The Income
[CMBS], asset-backed commercial paper, and so on). Tax Department of the Ministry of Finance asserted
24 Indian Securitization M arket: A Primer Spring 2017

Exhibit 2
Differences between PTC Securitization and DA Securitization
that mutual fund investments in PTC securitizations ASSET CLASSES PREVALENT

produced revenue leakage. This caused mutual funds to IN INDIAN SECURITIZATIONS
avoid PTC securitizations. The issues relating to invest-
ments by mutual funds were resolved by the Finance Act Typically, any asset that produces a predictable
2013, but mutual funds have yet to return to the PTC stream of cash f lows can be securitized. Throughout
securitization market as investors. the 1990s, securitization of auto loans remained the
centerpiece. Since then, several asset classes have been

introduced to the market, including housing loans, cor- Increased leverage. In some of the securitization
porate loans, commercial mortgage receivables, future transactions—including ones backed by gold loans,
f low receivables, project receivables, and toll revenues. loans against properties, micro-finance receivables,
The major asset classes prevalent in Indian securitization and personal loans—the originator’s primary motive
can be grouped as follows: is economic leverage. Securitization can allow an
originator to achieve greater leverage than it could by
1. Mortgage loans using only on-balance-sheet debt.
Managing portfolio risk. An originator can
a. Residential mortgage loans
use securitization to manage different dimensions of
b. Commercial mortgage loans
risk in its asset portfolio. It can use securitization to

2. Retail loan pools rebalance or redistribute such risks as credit, market,

and liquidity risks by selectively divesting certain assets.
a. Commercial vehicle loans
It can address diversification by using securitization to
b. Micro loans
reduce concentrated exposures to certain asset classes.
c. Car loans
Alternative funding source. Securitization can
d. Construction equipment loans
provide an originator with a source of funding apart
e. Gold loans
from the funding available by issuing traditional debt and
f. Loan sell-offs (LSOs)
equity securities. The originator’s liquidity is improved
g. Credit card receivables
by having access to securitization as a funding source.
h. Toll receivables.
Cost eff iciency. Funding via securitization is
usually less expensive than issuing corporate debt or
DRIVERS FOR SECURITIZATION IN INDIA borrowing from banks. Many securitizations carry high
credit ratings and pay lower interest rates than the rates
Both originators and investors have strong moti-
that an originator would have to pay on straight bonds
vations for participating in the Indian securitization
or bank loans.
market. As noted previously, compliance with priority
Asset–liability management. Securitization
sector lending targets has been the strongest driver for
enhance s an originator’s asset–liability management
banks to invest in Indian securitizations. Banks can
(ALM). Most securitization structures provide perfect
make up any deficit in their own generation of priority
or nearly perfect ALM by having a direct link between
sector loans by purchasing portfolios of such loans from
the cash f lows on the underlying assets and the cash
NBFCs. Nonetheless, there is more to the Indian secu-
f lows on the issued securities.
ritization market than just the priority sector lending
targets. The full range of factors that drive market par-
ticipation is much broader. Investors’ Incentives
Insurance companies, mutual funds, and banks

Originators’ Incentives are the main investors in Indian securitizations. Strong
credit ratings (often at the AAA level) combined with
The major originators of Indian securitization
attractive spreads draw life insurance companies to the
transactions are banks and financial intermediaries.
sector. Prepayment risk is important to life insurance
Their primary motives for originating transactions
companies because they have long investment hori-
include capital relief, profit stripping, and liquidity.
zons and need to match projected liabilities over the
Capital relief. For highly leveraged banks, NBFCs,
long term. Some securitizations have been structured
and microfinance entities, capital relief is a key incentive.
to reduce prepayment risk, which makes them more
However, it is clearly not the only one. If capital relief
appealing to life insurance companies and other investors
were the only motivation, synthetic securitization
with similar objectives. This has helped life companies
would have been a better solution. However, synthetic
to become a significant portion of the Indian securitiza-
securitization has not yet emerged in India.
tion investor base.

The selection of “route”—DA or PTC issuance in India. Exhibit 3 shows the fluctuating volumes
securitization—usually depends on investors’ prefer- and the breakdown across certain major subsectors over
ences. Deals are often customized to meet the investors’ the past five years. The dynamics of the subsectors and
requirements. For example, although mutual funds can their respective activity levels have changed over time.
invest only in “instruments,” banks ordinarily prefer to For example, as shown in Exhibit 3, loan sell-offs (LSOs)
obtain loan portfolios outright. One reason for banks’ have become extinct today. The regulatory directives
preference for DA securitizations is that loans (which are from the RBI did not include LSOs, and so these were
directly assigned in a DA securitization) are not subject out of favor in 2010–2011. The loans were typically
to mark-to-market rules, while securities (which are short term in nature, and an originator would disburse
issued in a PTC securitization) are subject to such rules. a loan with the intent to securitize it soon after the
Additional factors that motivate investors to invest disbursement. LSO activity levels were reduced by the
in securitizations include the following: introduction of minimum holding period requirements
in the RBI Guidelines on Securitization in 2012. This,
• Securitization provides better security to the inves- along with the drop in demand from mutual funds in
tors, because they have a direct claim over the making investments in LSOs, ultimately eliminated the
portfolio of assets. LSO market entirely.
• Investment is in highly rated structured finance Commercial vehicles and equipment are the largest
products. asset class in Indian securitization. The next largest is
• Rating stability—securitization investment is micro loans, with a 36% market share in fiscal year 2015–
considered to have less credit volatility than 2016. In financial year 2015–2016, the number and the
corporate debt. volume of micro-loan transactions increased by 66% and
• The f lexibility of securitization instruments serves 80%, respectively. Exhibit 4 shows the actual issuance
various investment objectives. volumes for various asset class for fiscal year 2014–2015
• Diversification of the investment portfolio. and projected issuance volumes for 2015–2016.
• Availability of fixed-income securities in medium- The RBI’s release of the priority sector lending
term and long-term instruments. requirements in July 2011 triggered a shift in activity
toward the asset classes covering the designated priority
HISTORICAL ISSUANCE VOLUMES sectors. Additionally, bilateral deals in DA securitiza-
tion format increased after the release of those require-
Regulatory changes and tax issues have been key ments and grew to account for 75% of ABS and RMBS
factors driving the f luctuating volume of securitization volumes in India. Before the release of the priority sector
Exhibit 3
Securitization Volumes in India, 2012–2016 (in USD billions)
Source: ICRA estimates.

Exhibit 4
Performance of Various Asset Classes in India (USD billions)
Source: ICRA estimates.
lending requirements, commercial vehicle loans and sector banks and public sector banks were drawn to
construction equipment loans had been the dominant the sector as investors, seemingly without regard to
asset classes. incentives for priority sector lending targets. The tax
The RBI’s update to the securitization guide- uncertainties about revenue leakage from mutual fund
lines in 2012 had a further impact on the markets (RBI investments in PTC securitizations were resolved in
[2012]). The update covered both DA securitizations 2013, but the funds remained edgy about making invest-
and PTC securitizations. After a brief pause in activity, ments in PTCs.
the market adapted to the updated guidelines, and secu- Furthermore, in May 2013, the RBI increased
ritization deals continued to take place. The updated the expsoure limits for agricultural and micro/small/
guidelines encouraged the use of the PTC securitization medium enterprise (MSME) sectors. This enabled
structure because they prohibited credit enhancement many banks to achieve greater priority sector lending
in the DA structure. volumes through their own loan originations and
However, 2012 was also the year that tax issues reduced their dependence on purchasing securitiza-
emerged, creating obstacles for securitization activity. tions from third parties (often NBFCs) for meeting
Tax officials expressed the view that SPVs should be their priority sector lending requirements. However,
subject to a minimum marginal tax rate, thereby threat- priority sector assets—either loans or securities backed
ening the economic efficiency of PTC securitizations. by priority sector loans—tend have low yields and
The new tax regime for PTC securitization transac- can depress a bank’s after-tax returns. This creates an
tions became effective for the 2013–2014 fiscal year. incentive for banks to invest in securitizations backed
It produced an unfavorable impact on the post-tax yields by nonpriority sector assets in order to achieve bal-
of banks, which in turn depressed PTC securitization ance sheet growth with higher returns. It remains to
issuance activity. The market shifted back to favoring be seen whether this will have an enduring impact on
bilateral transactions in the DA securitization format. the industry in the long run.
The following year brought a 150% increase in the issu- The bottom line is that the f low of regulatory and
ance of DA securitization transactions. tax changes has created a tumultuous environment for the
Fiscal year 2013–2014 brought a modest recovery Indian securitization market over the past several years.
in the level of RMBS issuance activity. Both private The changes have unsettled market participants and

disrupted the orderly evolution of the market. For better combination of loans and bonds. Indeed, the underlying
or worse, the regulatory and tax changes have altered assets of a CDO can even include ABS.
the market’s future course. Regulators have consis- The Indian securitization market’s f irst CBO
tently intended to promote securitization as a beneficial was executed in June 2014 by IFMR Capital, a non
financial technology within the context of the country’s banking finance company. The size of the deal was
growing capital markets. However, their actions have USD 15.07 million and the underlying pool comprised
not always carried out their intent. Unfortunately, the nonconvertible debentures from 11 issuers, each of
recent wave of regulatory and tax changes may have which was a first-time issuer of such securities. The
done more to impede market development than to sup- transaction marked an important step toward allowing
port it. such issuers to gain access (albeit indirectly) to the

The recent actions of the government suggest that capital markets.

they are looking forward to make an environment that IFMR Capital also has originated many multi-
will facilitate the growth of securitization in India. originator securitization transactions (“Mosecs”) backed
A lot of credit must be extended to the Indian Secu- by microfinance and small business loans. Such a trans-
ritization Foundation,1 which has played an important action is backed by a structured loan pool created by
role in helping regulators identify the problems in the combining loans from small and medium origina-
market. tors in order to create a well-diversified portfolio of a
The two major changes during the year—allowing critical size that can be taken to the market. The first
tax transparency in the securitization transactions in listed securitization in the country was IFMR Capital
India, vide the Finance Act 2016, by removing the dis- Mosec™ XXII, which was issued in January 2013 with
tribution tax on income distributed by the securitization eight underlying originators. IFMR Capital Mosec Aura
SPVs, and the RBI’s move to allow “foreign institutional is so far the largest securitization completed by IFMR
investors” and “foreign portfolio investors”2 to invest in Capital, worth USD 25 million with four participating
PTC securitizations originated by banks or NBFC and originators and 146,111 microloans.
any securitization debt instruments listed on the Indian
stock exchange—have paved the way for securitization FUTURE OUTLOOK
in India to grow.
The latest changes will likely encourage growth
RECENT INNOVATIONS of the Indian securitization market. Most significantly,
the new ability of foreign portfolio investors to partici-
The recent resurgence of Indian securitization pate in the market has the potential to accelerate issu-
activity has brought new types of deals into the market: ance activity by broadening the investor base. Other
collateralized bond obligations (CBOs) and collateral- key developments that may enhance the market growth
ized loan obligations (CLOs). These deals are similar to include the following:
other securitizations except that the underlying assets
(bonds or loans) are not newly originated but rather • The Finance Act 2016 resolved outstanding tax
come from the originating bank’s portfolio. Accord- issues that had created obstacles to PTC securi-
ingly, while the key motivation behind securitizations tizations and the use of SPV trusts. With those
of newly originated assets is often liquidity, a bank’s issues now resolved, PTC securitization is poised
motivation for a CBO or CLO securitization would to rebound sharply.
more likely be capital relief, risk transfer, arbitraging • The correction of anomalies with respect to taxa-
profits, or balance sheet optimization. tion of mutual funds means that mutual funds are
The key difference between a CBO and a CLO is more likely to return to the market as investors.
the nature of the underlying assets. In a CLO, the under- • The market for trade credit has been growing, and
lying assets are loans. In a CBO, the underlying assets are this will likely provide raw materials to fuel further
bonds. CLOs and CBOs are sometimes referred to col- growth of the securitization market in India.
lectively as collateralized debt obligations or CDOs. The • Future f low transactions have the potential to
term is also most descriptive of deals that may contain a develop and may draw new investors to the market.

Finally, the ongoing efforts by both governmental (iii) the applicant being a bank, is a resident of a country
authorities and market participants to strengthen the whose central bank is a member of Bank for Interna-
Indian securitization market strongly indicate that tional Settlements;
securitization in India is here to stay. (iv) the applicant is not resident in a country identified
in the public statement of Financial Action Task
Force as:
Appendix (v) a jurisdiction having a strategic Anti-Money
Laundering or Combating the Financing of Terrorism
FOREIGN PORTFOLIO INVESTORS3 deficiencies to which counter measures apply; or
(vi) a jurisdiction that has not made sufficient progress in
Foreign portfolio investors and foreign institutional

addressing the deficiencies or has not committed to

investors are foreign investors who have obtained a license an action plan developed with the Financial Action
from the Securities and Exchange Board of India to make Task Force to address the deficiencies;
investments in the Indian capital market. (vii) the applicant is not a nonresident Indian;
Based on the class of investor, there are three categories (viii) the applicant is legally permitted to invest in securities
of FPIs: outside the country of its incorporation or establish-
Category I FPI: Includes government and government- ment or place of business;
related investors such as central banks, governmental agen- (ix) the applicant is authorized by its Memorandum of
cies, sovereign wealth funds, and international or multilateral Association and Articles of Association or equivalent
organizations or agencies; document(s) or the agreement to invest on its own
Category II FPI: Includes the following: behalf or on behalf of its clients;
(x) the applicant has sufficient experience, good track
(i) appropriately regulated broad-based funds, such as record, is professionally competent, financially sound
mutual funds, investment trusts, insurance/reinsur- and has a generally good reputation of fairness and
ance companies; integrity;
(ii) appropriately regulated persons, such as banks, asset (xi) the grant of certificate to the applicant is in the interest
management companies, investment managers/ of the development of the securities market;
advisors, portfolio managers; (xii) the applicant is a fit and proper person based on the
(iii) broad-based funds that are not appropriately regulated criteria specified in Schedule II of the Securities and
but whose investment manager is appropriately regu- Exchange Board of India (Intermediaries) Regula-
lated—provided that the investment manager of such tions, 2008; and
broad-based fund is itself registered as a Category II (xiii) any other criteria specified by the Board from time
foreign portfolio investor: to time.
(iv) university funds and pension funds; and
(v) university-related endowments already registered
with the Board as foreign institutional investors or ENDNOTES
subaccounts. 1
Details can be viewed at: http://www.indiansecuri
tisation.com/.
Category III FPI: Includes all others not eligible under 2
See the Appendix.
Category I and II foreign portfolio investors, such as endow- 3
From the Securities and Exchange Board of India
ments, charitable societies, charitable trusts, foundations, cor-
(Foreign Portfolio Investors) Regulations, 2014 (http://www
porate bodies, trusts, individuals, and family offices.
.sebi.gov.in/cms/sebi_data/attachdocs/1389083605384.pdf ).
Criteria for getting registered as FPI:
(i) the applicant is a person not resident in India; REFERENCES

(ii) the applicant is resident of a country whose securities
market regulator is a signatory to the International Reserve Bank of India (RBI). “Guidelines on Securitisa-
Organization of Securities Commission’s Multilat- tion of Standard Assets.” RBI No. 2005-06/294, February 1,
eral Memorandum of Understanding (Appendix A 2006: https://www.rbi.org.in/scripts/Notif icationUser
Signatories) or a signatory to bilateral Memorandum .aspx?Id=2723.
of Understanding with the Board;

——. “Master Circular: Lending to Priority Sector.” RBI
No. 2011-12/107, July 1, 2011: https://rbi.org.in/scripts/
NotificationUser.aspx?Id= 6603.
——. “Revisions to the Guidelines on Securitisation Trans-

actions,” RBI No. 2011-12/540. May 7, 2012: https://
rbi.org.in/scripts/NotificationUser.aspx?Id=7184.
To order reprints of this article, please contact Dewey Palmieri

at dpalmieri@ iijournals.com or 212-224-3675.

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Indian Securitization Market:

Spring 2017 The Journal of Structured Finance 23

Sources: D&B and ARCIL.

SECURITIZATION STRUCTURES The RBI issued the first set of securitization

24 Indian Securitization M arket: A Primer Spring 2017

that mutual fund investments in PTC securitizations ASSET CLASSES PREVALENT

Spring 2017 The Journal of Structured Finance 25

risk in its asset portfolio. It can use securitization to

2. Retail loan pools rebalance or redistribute such risks as credit, market,

Insurance companies, mutual funds, and banks

26 Indian Securitization M arket: A Primer Spring 2017

Source: ICRA estimates.

Spring 2017 The Journal of Structured Finance 27

Source: ICRA estimates.

28 Indian Securitization M arket: A Primer Spring 2017

port it. such issuers to gain access (albeit indirectly) to the

The recent actions of the government suggest that capital markets.

Spring 2017 The Journal of Structured Finance 29

Foreign portfolio investors and foreign institutional

addressing the deficiencies or has not committed to

(i) the applicant is a person not resident in India; REFERENCES

30 Indian Securitization M arket: A Primer Spring 2017

——. “Revisions to the Guidelines on Securitisation Trans-

To order reprints of this article, please contact Dewey Palmieri

at dpalmieri@ iijournals.com or 212-224-3675.

Spring 2017 The Journal of Structured Finance 31

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