The Reserve Bank of India, in its credit policy announced on 27th Oct 2009 (view the credit policy here) has put up two requirements for securitisation – a minimum 10% originator retention, and a minimum seasoning of 12 months. Obviously, the RBI is meaning to be overly stringent when it comes to securitisation. In the wake of the subprime crisis, at some forums, RBI officials self-complimented saying that India had not suffered due to securitisation as RBI was sufficiently prudent. The fact, actually, is that if we are crawling, you cannot feel happy at the fact that the other guy who was riding a horse fell.
Even while international regulators are imposing a minimum of 5% risk retention for securitisation (see EU regulation here and US regulation here), the RBI just doubles that number. Of course, it is not clear from the credit policy whether the 10% slice is a vertical slice or horizontally lower slice. If it is vertical slice, it would make no difference at all, and in fact, would defeat the very purpose of laying down risk retention. If it is lower horizontal 10%, it would be one of the most impractical stipulations to lay down, as, if there is 10% risk of losses in a pool of assets, then the very idea of securitisation, nay, the very idea of banking, should fail. Banks globally require 4% Tier 1 capital, and 8% total capital, with the understanding that it is unlikely that unexpected portfolio losses should exceed 8% of assets. Note that capital requirements are only for unexpected losses – as expected losses are anyway taken care of by credit spreads. If originators were to keep a 10% first loss piece in a pool, they are keeping more risk to themselves than there, whereas a securitisation should result into at least some extreme loss risk.
There is simply no basis to explain that number 10%. It is clearly the product of over-enthused regulation, unmindful of the concept of economic capital.
What makes the 10% risk stipulation acute is that this is over and above the excess spreads, which are usually anyway retained in securitisation pools. The excess spreads should logically take care of expected losses. If unexpected losses exceed 10%, there is no point in bankers creating loan pools, not to speak of securitizing them.
Equally illogical is the minimum seasoning requirements.
Though the fine print of the RBI stipulation is yet to come, one would not be surprised, if the guidelines remain limited to “securitisation” and not a transfer of a loan. Past guidelines have made a stupid reference to “securitisation” meaning a transfer of financial assets to SPVs, thereby excluding from its scope such transactions as do not involve SPVs.
In short, the RBI move will simply kill the securitisation market in India.
Even while international regulators are imposing a minimum of 5% risk retention for securitisation (see EU regulation here and US regulation here), the RBI just doubles that number. Of course, it is not clear from the credit policy whether the 10% slice is a vertical slice or horizontally lower slice. If it is vertical slice, it would make no difference at all, and in fact, would defeat the very purpose of laying down risk retention. If it is lower horizontal 10%, it would be one of the most impractical stipulations to lay down, as, if there is 10% risk of losses in a pool of assets, then the very idea of securitisation, nay, the very idea of banking, should fail. Banks globally require 4% Tier 1 capital, and 8% total capital, with the understanding that it is unlikely that unexpected portfolio losses should exceed 8% of assets. Note that capital requirements are only for unexpected losses – as expected losses are anyway taken care of by credit spreads. If originators were to keep a 10% first loss piece in a pool, they are keeping more risk to themselves than there, whereas a securitisation should result into at least some extreme loss risk.
There is simply no basis to explain that number 10%. It is clearly the product of over-enthused regulation, unmindful of the concept of economic capital.
What makes the 10% risk stipulation acute is that this is over and above the excess spreads, which are usually anyway retained in securitisation pools. The excess spreads should logically take care of expected losses. If unexpected losses exceed 10%, there is no point in bankers creating loan pools, not to speak of securitizing them.
Equally illogical is the minimum seasoning requirements.
Though the fine print of the RBI stipulation is yet to come, one would not be surprised, if the guidelines remain limited to “securitisation” and not a transfer of a loan. Past guidelines have made a stupid reference to “securitisation” meaning a transfer of financial assets to SPVs, thereby excluding from its scope such transactions as do not involve SPVs.
In short, the RBI move will simply kill the securitisation market in India.
The RBI guidelines on securitization is anti public. RBI simply does not want NBFCs and Banks to get low cost funding through securitization from MFs. So, it is regulating the originators as it does not have control over the MFs. By doing this NBFCs will have to keep borrowing from the banks at the prevailing high rates which in turn would be paid by the loan customers. We have a practical case where one of NBFC originator is securitizing his assets and is ready to lower the interest rates for public to avail loans. So, indirectly the public would be the beneficiary from securitization as the benefit is getting transferred. But thanks to RBI this will stop in due time. Thus, RBI's stance is anti public!
ReplyDeleteAnup Nathani
SPAN Analytics Pvt. Ltd., Mumbai
anup.nathani@spananalytics.com