January 27, 2010: The securitisation market, where banks slice loans and sell them down as securities to investors such as mutual funds and banks, has come to a near standstill. Banks are now awaiting further clarification from the regulator on a recent directive, mandating lenders to retain a part of these products on their books. RBI recently told banks to hold loans for a year before selling it down as securities. It also said a tenth of the total amount would have to be retained by banks but the regulator is yet to issue a regulatory amendment. Merchant bankers also say the sentiment has been dampened by the fact that leading private banks are now seeking to pare their asset book.

Securitisation is a process, by which a bank or a financial institution creates marketable securities by splitting receivables such as home loans, project loans or even credit card payments. At its peak in 2007-08, close to Rs 50,000 crore of short-term loans were annually securitised in India, with mutual funds and insurance companies being the leading investors. But with the unravelling of the global credit market crisis and the collapse of Lehman Brothers in September 2008, there is hardly any appetite for such products.

"The market has literally come to a halt, given all the regulatory uncertainty," said Nirav Dalal, head of debt capital markets at Yes Bank. "People are not sure whether the amendment is operational or not," he added. He expects RBI to announce the operationalistion of rules shortly. There is no central database where data of securitisation transactions are maintained. The only source of data are announcements by rating agencies. An official at Fitch Ratings, however, said the drop has been high in "single loan sell downs," where a loan given to a single corporate is split into securities. (Banks also pool assets like loans given to several individuals for buying cars.) He explained that securitisation in certain segments such as commercial vehicles loans is still popular in the market.

Bankers also said the loan demand from consumers and industry itself has been low. Only state-owned banks have seen any significant disbursals of loans, but they have historically kept away from securitising assets. The more traditional leaders in the segment, private banks such as ICICI Bank, are busy downsizing or shrinking their loan books. The Indian securitisation market has been restricted largely to short-term, high-rated loans - market players lured by higher returns offered by the securities. "Securitisation transactions in the US and Europe turned sour not due to inherent weaknesses with securitisation as an instrument but due to over-exuberant lending," said Vinod Kothari, a Kolkata-based author and securitisation expert. "There is no evidence to suggest that if those loans stayed on the balance sheet of banks, they would have been any good," while making out a strong case for a differential treatment in India.

Mr Kothari said new regulations are only for products technically defined as securitisation, which leaves out the market for bilateral sale of whole loans or portfolios. "This has made the market move anachronistically into what is a most primitive form of originate-to-distribute model," he said.