India: Biggest bank essays loan securitization


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State Bank of India has decided to enter India’s rapidly growing market for securitized assets.

By Kautilya Shastri

In a deal that is expected to rewrite the rules of the game, India’s largest bank is getting ready to launch its first securitization transaction in June. It will be the first piece of a larger plan announced by State Bank of India chairman AK Purwar at the end of March to package and sell about a quarter of its total loans over the next two years. SBI has not yet revealed the nuts and bolts of the plan.

Securitization has steadily been gaining ground in India over the past few years. The market is still nascent, however. Total volumes between the 2002 and 2005 financial years, according to estimates by credit rating agency Investment and Credit Rating Agency (Icra), was around $12 billion. The compound annual growth rate over this period was a handsome 70.12%. Issuance had dropped off over the past year because the market was waiting for the Reserve Bank of India, the central bank, to announce guidelines for securitization of standard bank assets, which it eventually did in February 2006. Issuance is expected to pick up in the months ahead, with SBI leading the way.


The market for securitized assets is still narrow and lacks depth. While a few foreign banks, private sector banks and finance companies have done pioneering deals, the large public sector banks have restricted themselves to the role of buyers. The secondary market is thin, with most investors tending to hold paper to maturity. And the type of assets being securitized is also limited: largely retail, mortgage and auto loans have been sold. Such asset-backed and mortgage-backed securities accounted for 83% of issuance in the 2005 financial year. There have hardly been any CBO and CDO deals, although ICICI Bank has tested the waters with a handful.

HDFC Bank has been one of the few banks active in the securitization market, both as an originator and as an investor. “Our deals have been substantially driven by the need to manage capital better,” says Paresh Sukhtankar, head of credit and market risk at HDFC Bank. Many other banks have done securitization deals for capital management. Profit booking too has been an important driver of growth, since Indian interest rates were downward bound between 1998 and 2003. Banks with a portfolio of high-interest loans have tended to book profits as interest rates declined.

Fund credit

SBI insiders say that its reason for seeking securitization is quite different. The bank wants to liquidate its frozen assets and fund the next round of credit growth. Credit in India has grown by more than 30% over the past two years. Deposit growth has not kept pace, both because banks have not been focused on this part of their task and also because households have diverted part of their savings into the booming stock market. The Indian banking sector is perhaps headed for a period of tight liquidity, which is why SBI has decided to generate resources for future credit growth by selling off its old loans. Other public sector banks are watching the situation closely and are expected to follow SBI if it meets with success over the next few months.

Two important problems will have to be overcome. “It is to be seen if there are enough takers for SBI’s assets. The depth of the market will be tested,” says Ananda Bhoumik, senior director at Fitch Ratings. (SBI’s total loan book is $55 billion, of which retail loans account for $12 billion.) Public sector banks and debt mutual funds have been among the biggest buyers of securitized assets. The public sector banks are no longer flush with liquidity and debt funds have been attracting fewer investors than the equity funds.

So who will absorb this sudden flood of issuance? New categories of investors will be needed. Prashant Purker, head of the structured products group at ICICI Bank, points out that an amendment to the Securities Contract Regulation Act has now been tabled in the Indian parliament, to give official recognition to pass-through certificates (PTCs) issued against loans. The Reserve Bank of India has also put out its first set of regulations on the securitization of standard loans. Although these new regulations have not completely satisfied bankers, the fact is that they are a step forward. The official recognition being given to PTCs could clear the way for new categories of investors to enter, especially insurance companies, pension funds and foreign portfolio investors.

The second set of issues is internal. Although SBI has invested heavily in technology, there are still doubts whether or not the other public sector banks have adequate management information systems to enable them to pool together and track loans that have been made by branches across the country. These, hopefully, will be teething troubles. The entry of SBI and, later, the other public sector banks, is likely to give a huge boost to India’s fledgling market for securitized bank assets.

Seeking securitization
Securitization in India
YearValueNumber of deals
Note: Values in billion rupees
Source: Icra