A STUDY ON

SECURITIZATION –
CURRENT PRACTICES AND FUTURE
PROSPECTS
WITH SPECIAL REFERANCE TO BANKS HEADQUARTERED
IN DELHI AND HARYANA

PRESENTED BY
MUDASIR AHMED
MIR
THE UNIVERSITY
OF KASHMIR
CONTENTS
OBJECTIVE OF THE STUDY.

INTRODUCTION TO SECURITIZATION.

SECURITIZATION IN INDIA.

STUDY OF DATA ON SECURITIZATION IN BANKS

HEADQUARTERED WITHIN DELHI & HARYANA.

RESULTS & RECOMMENDATIONS.

LIMITATIONS OF THE STUDY.

OBJECTIVE OF
THE
STUDY
 OBJECTIVE OF THE STUDY
THE STUDY IS CONDUCTED WITH THE
OBJECTIVE OF PROVIDING AN INSIGHT
INTO THE PREVALENT PRACTICES AND
FUTURE PROSPECTS FOR
SECURITIZATION IN THE BANKS
HEADQUARTERED WITHIN THE AREA OF
DELHI AND HARYANA. ACCORDINGLY,
THE TERMS OF REFERENCE OF THE
INTRODUCTION TO
SECURITIZATION
 ORIGINATION OF THE
CONCEPT
THE ORIGINATE-TO-DISTRIBUTE MODEL.

A VARIATION OF TRADITIONAL ORIGINATE-TO-HOLD MODEL.

INTERMEDIARIES ORIGINATE LOANS WITH THE INTENTION OF

TRANSFERRING THE ASSET AND ITS COMMENSURATE RISK
OUT OF THEIR BALANCE SHEET TO ANOTHER ENTITY.

SEPARATION OF RISK ORIGINATION FROM AGGREGATION.

 SECURITIZATION DEFINED
A PROCESS OF POOLING AND REPACKAGING OF HOMOGENOUS
ILLIQUID FINANCIAL ASSETS INTO MARKETABLE SECURITIES
THAT CAN BE SOLD TO INVESTORS.

A CREDIT ARBITRAGE TRANSACTION THAT PERMITS FOR MORE

EFFICIENT MANAGEMENT OF RISKS BY ISOLATING A SPECIFIC
POOL OF ASSETS FROM THE ORIGINATOR'S BALANCE SHEET
 MAJOR STEPS

1) CREATION OF A SPECIAL PURPOSE VEHICLE (SPV) TO HOLD

THE FINANCIAL ASSETS UNDERLYING THE SECURITIES;

2) SALE OF THE FINANCIAL ASSETS BY THE ORIGINATOR OR

HOLDER OF THE ASSETS TO THE SPECIAL PURPOSE VEHICLE,
WHICH WILL HOLD THE ASSETS AND REALIZE THE ASSETS;

3) ISSUANCE OF SECURITIES BY THE SPV, TO INVESTORS,

AGAINST THE FINANCIAL ASSETS HELD BY IT.
STRUCTURE OF
SECURITIZATION
Click to edit Master text styles
Second level
● Third level

● Fourth level

● Fifth level
 STAGES IN THE PROCESS OF
SECURITIZATION
§ THE ORIGINATOR DETERMINES WHICH ASSETS HE WANTS TO SECURITIZE FOR RAISING FUNDS.

§ THE SPV IS FORMED.

§ THE SPV IS FUNDED BY INVESTORS AND ISSUES SECURITIES TO THE INVESTORS.

§ THE SPV ACQUIRES THE RECEIVABLES UNDER AN AGREEMENT AT THEIR DISCOUNTED VALUE.

§ THE SERVICER FOR THE TRANSACTION IS APPOINTED, NORMALLY THE ORIGINATOR.

§ THE DEBTORS ARE /ARE NOT NOTIFIED DEPENDING ON THE LEGAL REQUIREMENTS.

§ THE SERVICER COLLECTS THE RECEIVABLES, USUALLY IN AN ESCROW MECHANISM, AND PAYS OFF

THE COLLECTION TO THE SPV.

 SECURITIZATION PROCESS
(cntd…..)
THE SPV EITHER PASSES THE COLLECTION TO THE INVESTORS, OR REINVESTS THE

SAME TO PAY OFF TO INVESTORS AT STATED INTERVALS.

IN CASE OF DEFAULT, THE SERVICER TAKES ACTION AGAINST THE DEBTORS AS THE

SPV’S AGENT.

WHEN ONLY A SMALL AMOUNT OF OUTSTANDING RECEIVABLES ARE LEFT TO BE

COLLECTED, THE ORIGINATOR MAY CLEAN UP THE TRANSACTION BY BUYING

BACK THE OUTSTANDING RECEIVABLES.

AT THE END OF THE TRANSACTION, THE ORIGINATOR’S PROFIT, IF RETAINED AND

SUBJECT TO ANY LOSSES TO THE EXTENT AGREED BY THE ORIGINATOR, IN

THE TRANSACTION IS PAID OFF.

 PARTIES INVOLVED

MAIN PARTIES
1. THE ORIGINATOR: THE ENTITY ON WHOSE BOOKS THE
ASSETS TO BE SECURITIZED EXIST.

2. THE SPECIAL PURPOSE VEHICLE (SPV): THE ENTITY,

WHICH BUYS THE ASSETS TO BE SECURITIZED FROM THE
ORIGINATOR.

3. THE INVESTORS: THE ENTITIES WHO INVEST IN THE

SECURITIES.
 PARTIES INVOLVED (contd…)

OTHER PARTIES
THE OBLIGOR/S: THE ORIGINATOR'S
DEBTOR THAT IS THE BORROWER OF THE
ORIGINAL LOAN.

THE RATING AGENCY : THE AGENCY

THAT RATES THE STRUCTURE.

ADMINISTRATOR OR SERVICER: THE

PARTY THAT COLLECTS THE PAYMENT DUE
 PARTIES INVOLVED (contd…)

THE REGULATORS WHOSE PRINCIPAL

CONCERNS RELATE TO CAPITAL
ADEQUACY, LIQUIDITY, AND CREDIT
QUALITY OF THE STRUCTURE, AND
BALANCE SHEET TREATMENT OF THE
TRANSACTION.

CREDIT ENHANCER: THE PARTY THAT

T● F
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TYPES OF SECURITIZATION
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 TYPES OF SECURITIZATION
(contd…)
ASSET BACKED SECURITIZATION: ASSET BACKED
SECURITIZATION INVOLVES THE CONVERSION OF EXISTING
ASSETS INTO MARKETABLE SECURITIES.

FUTURE FLOW SECURITIZATION: FUTURE FLOW

SECURITIZATION INVOLVES THE CONVERSION OF FUTURE

CASH FLOWS INTO MARKETABLE SECURITIES.

T● S
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 TYPES OF SECURITIZATION
STRUCTURE (contd…)
IN A CASH FLOW-BASED SECURITIZATION, THE OWNERSHIP
OF THE ASSETS WHOSE CASH FLOWS ARE TO BE
SECURITIZED, ARE ACTUALLY TRANSFERRED TO THE SPV.

IN A SYNTHETIC” SECURITIZATION, THE CASH FLOWS

AND/OR ECONOMIC EXPOSURE ARE TRANSFERRED TO THE
SPV THROUGH THE USE OF A CREDIT DERIVATIVE.SYNTHETIC
SPVS DO NOT ASSUME ACTUAL OWNERSHIP OF ANY ASSETS.
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 SECURITIES ISSUED BY SPV
(contd…)

ON THE BASIS OF
UNDERLYING

ASSET BACKED SECURITIES

(ABS): SECURITIES ISSUED BY
SPV IN A SECURITIZATION
 SECURITIES ISSUED BY SPV
(contd…)

ON THE BASIS OF STRUCTURE

PASS-THROUGH CERTIFICATES: PASS-THROUGH
CERTIFICATES ARE IN THE NATURE OF PARTICIPATION
CERTIFICATES THAT ENABLE THE INVESTORS TO TAKE A
DIRECT EXPOSURE ON THE PERFORMANCE OF THE
SECURITIZED ASSETS.

PAY-THROUGH CERTIFICATES: PAY –THROUGH

CERTIFICATES GIVE INVESTORS ONLY A CHARGE AGAINST
THE SECURITIZED ASSETS, WHILE THE ASSETS THEMSELVES
ARE OWNED BY THE SPV.
 CREDIT ENHANCEMENT
CREDIT ENHANCEMENT REFERS TO ANY ACTIVITY
THAT AIMS AT REDUCING THE RISK ASSOCIATED
WITH SECURITIZED INSTRUMENTS AND
INCREASING THE CREDITWORTHINESS OF THE SPV
ISSUING SUCH FINANCIAL INSTRUMENTS.

CREDIT ENHAANCEMENT CAN BE OF TWO TYPES:

1. INTERNAL CREDIT ENHANCEMENT

2. EXTERNAL CREDIT ENHANCEMENT.

 TYPES OF CREDIT
ENHANCEMENT
INTERNAL CREDIT ENHANCEMENT REFERS TO CREDIT
ENHANCEMENT PROVIDED INTERNALLY BY THE SPV.

TYPES OF INTERNAL CREDIT ENHANCEMENT:

Ø EXCESS SPREAD.

Ø OVERCOLLATERALIZATION.

Ø RESERVE ACCOUNT.

Ø CREDIT TRANCHING.

Ø CASH COLLATERAL.
 TYPES OF CREDIT
ENHANCEMENT
EXTERNAL CREDIT ENHANCEMENT REFERS TO CREDIT
ENHANCEMENT PROVIDED BY THIRD PARTIES.

TYPES OF EXTERNAL CREDIT ENHANCEMENT:

Ø LETTR OF CREDIT.

Ø INSURANCE.

Ø THIRD PARTY GUARANTEE.

Ø CASH COLLATERAL ACCOUNT.

 ADVANTAGES OF
SECURITIZATION
ADVANTAGES TO THE ADVANTAGES TO THE
ORIGINATOR INVESTOR
LOW EVENT RISK.

STRUCTURED ISSUANCES.

LIQUIDITY HIGHER YIELDS FO SIMILAR/LOWER

RISK.

REDUCTION IN DIVERSIFICATION OF INVESTMENT

OPPORTUNITIES

ASSET-LIABILTY
MISMATCH.
 DISADVANTAGES OF
SECURITIZATION
DISADVANTAGES TO THE DISADVANTAGES TO THE
ORIGINATOR INVESTOR

REDUCTION IN PORTFOLIO EXPOSURE TO CREDIT RISK.

QUALITY.
RISK OF PREPAYMENT.
INCREASED COSTS.
REINVESTMENT RISK.
SIZE LIMITATIONS.
COMMINGLING RISK.
LOWER CAPITAL
SEVICER RISK.
REQUIREMENTS.

RISKS OF IMPAIRMENT.
 RISKS TO THE FINANCIAL
SYSTEM
REPLACES ONE INTERMEDIARY WITH
MANY.

SEGREGATES RISK ORIGINATION FROM

RISK AGGREGATION.

ENCOURAGES TRANSFER OF RISK WHICH

RESULTS IN POOR RISK HANDLING
MEASURES.
SECURITIZATION IN INDIA
 SECURITIZATION IN INDIA
THE FIRST SECURITIZATION TRANSACTION IN INDIA WAS COMPLETED IN
1991.

SECURITIZATION HAS BECOME A SOLID SOURCE OF FUNDING VIA THE

CAPITAL MARKETS IN INDIA. ALTHOUGH THE MARKET REMAINS
PREDOMINANTLY DOMESTIC, WITH RATINGS ASSIGNED WITHIN THE
NATIONAL SCALE, EFFORTS TO ACCESS THE INTERNATIONAL CAPITAL
MARKETS ARE BEING EXPLORED BY LARGER ORIGINATORS.

THE GROWTH IN THE INDIAN SECURITIZATION MARKET HAS BEEN

LARGELY FUELLED BY THE REPACKAGING OF RETAIL ASSETS AND
RESIDENTIAL MORTGAGES OF BANKS AND FINANCIAL INSTITUTIONS
(FIS).

ASSET BACKED SECURITIZATION (ABS) IS THE LARGEST PRODUCT

CLASS.THE MORTGAGE BACKED SECURITIES (MBS) MARKET HAS BEEN
RATHER SLOW IN TAKING OFF DESPITE A GROWING HOUSING FINANCE
MARKET DUE TO THE LONG MATURITY PERIODS AND THE RISK ARISING
FROM PREPAYMENT / REPRICING OF THE UNDERLYING LOAN.
 SECURITIZATION IN INDIA
(contd…)
SECURITIZATION IN INDIA LARGELY ADOPTS A TRUST
STRUCTURE WITH THE UNDERLYING ASSETS BEING
TRANSFERRED BY WAY OF SALE TO A TRUSTEE COMPANY.
THE SPV, FORMED AS A TRUSTEE COMPANY, ISSUES
SECURITIES THAT ARE EITHER PASS THROUGH CERTIFICATES
OR PAY THROUGH CERTIFICATES (PTC). THE TRUSTEE IS THE
LEGAL OWNER OF THE UNDERLYING ASSETS IN BOTH THE
SCENARIOS.

ISSUANCE VOLUME BY NUMBER OF TRANSACTIONS IS

SIGNIFICANT IN INDIA, WITH DOZENS OF DEALS COMING TO
 REGULATIONS RELATED TO
SECURITIZATION IN INDIA
INDIAN FINANCIAL MARKETS HAVE BEEN WITNESSING SECURITIZATION DEALS
SINCE 1990 WITH THE FIRST SECURITIZATION DEAL TAKING PLACE CITIBANK AND
GIC MUTUAL FUND IN 1991 FOR RS 160 MILLION. ON THE LINES OF SECURITIZATION,
TWO MAJOR TYPES OF FINANCIAL TRANSACTIONS CAN BE WITNESSED IN INDIAN
MARKETS:

SECURITIZATION OF STANDARD ASSETS.

SALE OF NPAS TO RC/SCS AND/OR BANKS/FIS.

THE SECURITIZATION OF STANDARD ASSETS INVOLVES THE CORE PROCESS OF

SECURITIZATION WHEREBY AN ORGANIZATION CHERRY PICKS LOAN ASSETS AND
SELLS THEM TO AN SPV WHICH IN TURN ISSUES SECURITIES TO INVESTORS AGAINST
SUCH LOAN ASSETS. ON THE OTHER HAND, THE SALE OF NPAS TO RC/SCS OR OTHER
FIS INVOLVES THE SELLING OF DISTRESSED LOANS TO THESE INSTITUTIONS BY
BANKS/FIS AND GETTING THEIR BALANCE SHEET CLEARED OF NPAS.
 REGULATIONS RELATED TO
SECURITIZATION IN INDIA
(contd…)
THE MOST SIGNIFICANT STEP TOWARDS REGULATION OF
SECURITIZATION MARKET WAS THE ENACTMENT OF
SARFAESI ACT IN 2002.

OTHER MAJOR STEPS WERE THE ISSUANCE OF :

THE SECURITISATION COMPANIES AND

RECONSTRUCTION COMPANIES (RESERVE BANK)
GUIDELINES AND DIRECTIONS IN 2003.

GUIDELINES ON PURCHASE/SALE OF NON PERFORMING

ASSETS DATED 13 JULY 2005.
 SARFAESI ACT, 2002
THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND
ENFORCEMENT OF SECURITY INTEREST ACT, 2002 (SARFAESI ACT) IS A MIX OF THREE
DIFFERENT THINGS -

SECURITISATION,

ASSET MANAGEMENT COMPANIES AND

ENFORCEMENT OF SECURITY INTERESTS ON LOAN DEFAULTS TO BANKS.

THE BASIC INTENTION BEHIND THIS ACT IS TO STRENGTHEN CREDITOR RIGHTS

THROUGH FORECLOSURE AND ENFORCEMENT OF SECURITIES BY BANKS AND
FINANCIAL INSTITUTIONS. BY CONFERRING ON LENDERS THE RIGHT TO SEIZE AND SELL
ASSETS HELD AS COLLATERAL IN RESPECT OF OVERDUE LOANS, IT ALLOWS BANKS AND
FINANCIAL INSTITUTIONS TO RECOVER THEIR DUES PROMPTLY WITHOUT GOING
THROUGH A COSTLY AND TIME-CONSUMING LEGAL PROCESS.
 SARFAESI ACT (contd…)

THE ACT CONTAINS VI

CHAPTERS AND 42 SECTIONS:

CHAPTER I - PRELIMINARY
SHORT TITLE AND
COMMENCEMENT.
 SARFAESI ACT (contd…)
THE SARFAESI ACT AIMED AT ERADICATING THE SHORTCOMINGS OF ALL THE
PREVIOUS LEGISLATIONS FOR RECOVERY OF DEBTS AND TO BRING THE
FINANCIAL INSTITUTIONS AT PAR WITH THE REST OF THE WORLD BY
STRESSING MORE ON THE RECOVERY PART RATHER THAN ASCERTAINMENT
PART FOR DUES

THE CONCEPT OF AN ARC (ASSET RECONSTRUCTION COMPANY) WAS

INTRODUCED IN THIS ACT.

THE INTENT OF THE ACT FOCUSES ON THE BAD LOANS ARISING OUT OF A
SYSTEMATIC BANKING CRISIS IN THE COUNTRY AND NOT ON THE BAD
LOANS ORIGINATING FROM BAD LENDINGS IN THE USUAL BANKING
OPERATIONS.

THE ACT ALSO EMPOWERS SECURED CREDITORS TO ENFORCE THEIR

SECURITY INTEREST IN THE ASSETS WITHOUT THE INTERVENTION OF THE
COURT.
 THE SECURITISATION COMPANIES AND
RECONSTRUCTION COMPANIES (RESERVE BANK)
GUIDELINES AND DIRECTIONS
THESE GUIDELINES ISSUED BY THE RBI IN 2003 COVERED THE
MAJOR ASPECTS REALATING TO SECURITIZATION DELAS. THE
MAIN PROVISIONS ARE:

TREATMENT OF NPA’S. DEPLOYMENT OF FUNDS.

REGISTRATION OF SC/RCs ACCOUNTING YEAR.

AND MATTERS
ASSET CLASSIFICATION.
INCIDENTAL THERETO.
INVESTMENTS.
OWNED FUND.
INCOME RECOGNITION.
PERMISSIBLE BUSINESS.
DISCLOSURES IN THE
ASSET RECONSTRUCTION
BALANCE SHEET.
 EXCEPTIONS TO SECURITIZATION
A LIEN ON ANY GOODS, MONEY OR SECURITY
GIVEN BY OR UNDER THE INDIAN CONTRACT ACT
OR THE SALE OF GOODS ACT OR ANY OTHER LAW
FOR THE TIME BEING IN FORCE.

A PLEDGE OF MOVABLES.

CREATION OF ANY SECURITY IN ANY AIRCRAFT AND

ANY VESSEL.

ANY CONDITIONAL SALE, HIRE PURCHASE OR

LEASE OR ANY OTHER CONTRACT IN WHICH NO
 CHARACTERISTICS OF THE INDIAN
SECURITIZATION MARKET
THE MAIN CHARACTERISTICS OF INDIAN SECURITIZATION MARKET ARE:

INDIA IS A SIGNIFICANT SECURITIZATION MARKET IN ASIA AND IT DISPLAYS A SET OF

UNIQUE FEATURES THAT DISTINGUISH IT FROM OTHER JURISDICTIONS.

SENIOR NOTES ARE GENERALLY ENHANCED THROUGH A CASH RESERVE OR GUARANTEE

PROVIDED BY A HIGHLY RATED INSTITUTION.

NATIONAL RATINGS IN INDIA DENOTE TIMELY PAYMENT OF INTEREST AS WELL AS

PRINCIPAL. THIS IS PROBABLY THE MAIN DIFFERENCE TO MOST OTHER JURISDICTIONS,
WHERE GENERALLY ONLY TIMELY PAYMENT OF INTEREST APPLIES.

THE INVESTOR BASE IS LIMITED, COMPRISING MUTUAL FUNDS, INSURANCE COMPANIES,

NBFCS AND A FEW PRIVATE SECTOR BANKS.

MOST INVESTMENTS IN SECURITIZED PAPER ARE MADE ON A “HOLD TO MATURITY” BASIS

ALTHOUGH PASS-THROUGH CERTIFICATES ARE NOW RECOGNIZED AS SECURITIES AND
ACTIVELY TRADED ON STOCK EXCHANGES.
 SOME MAJOR SECURITIZATION DEALS
INININDIA:
FIRST SECURITIZATION DEAL INDIA BETWEEN CITIBANK AND GIC
MUTUAL FUND IN 1991 FOR RS 160 MILLION.

L&T RAISED RS 4,090 MILLION THROUGH THE SECURITIZATION OF

FUTURE LEASE RENTALS TO RAISE CAPITAL FOR ITS POWER PLANT IN
1999.

INDIA’S FIRST SECURITIZATION OF PERSONAL LOAN BY CITIBANK IN

1999 FOR RS 2,841 MILLION.

INDIA’S FIRST MORTGAGE BACKED SECURITIES ISSUE (MBS) OF RS 597

MILLION BY NHB AND HDFC IN 2001.

SECURITIZATION OF AIRCRAFT RECEIVABLES BY JET AIRWAYS FOR RS

16,000 MILLION IN 2001 THROUGH OFFSHORE SPV.

INDIA’S FIRST SALES TAX DEFERRALS SECURITIZATION BY

GOVERNMENT OF MAHARASHTRA IN 2001 FOR RS 1,500 MILLION. .
 MAJOR SECURITIZATION DEALS IN INDIA
INDIA’S FIRST DEAL IN THE POWER(contd…)
SECTOR BY KARNATAKA ELECTRICITY BOARD FOR
RECEIVABLES WORTH RS 1,940 MILLION AND PLACED THEM WITH HUDCO.

INDIA’S FIRST COLLATERALIZED DEBT OBLIGATION (CDO) DEAL BY ICICI BANK IN 2002

INDIA’S FIRST FLOATING RATE SECURITIZATION ISSUANCE BY CITIGROUP OF RS 2,810

MILLION IN 2003. THE FIXED RATE AUTO LOAN RECEIVABLES OF CITIBANK AND
CITICORP FINANCE INDIA INCLUDED IN THE SECURITIZATION

INDIA’S FIRST SECURITIZATION OF SOVEREIGN LEASE RECEIVABLES BY INDIAN

RAILWAY FINANCE CORPORATION (IRFC) OF RS 1,960 MILLION IN 2005. THE RECEIVABLES
CONSISTED OF LEASE AMOUNTS PAYABLE BY THE MINISTRY OF RAILWAYS TO IRFC

INDIA’S LARGEST SECURITIZATION DEAL BY ICICI BANK OF RS 19,299 MILLION IN 2007.

THE UNDERLYING ASSET POOL WAS AUTO LOAN RECEIVABLES.

SKS ENTERS INTO RS 200 CRORES SECURITIZATION DEAL WITH ICICI BANK IN 2009.
STUDY OF DATA
 RESEARCH METHODOLOGY
THE CURRENT STUDY IS A DESCRIPTIVE ONE DESIGNED TO EVALUATE THE PRESENT
SITUATION OF SECURITIZATION AND ITS FUTURE PROSPECTS. THE RESEARCH IS
FOCUSED ON THE BANKS HEADQUARTERED IN DELHI AND HARYANA REGION.

THE RESEARCH WAS CARRIED BY QUESTIONNAIRE METHOD . THE QUESTIONNAIRE WAS

DRAFTED TO HIGHLIGHT THE BASIC ISSUES OF THE SECURITIZATION DEALS ENTERED
INTO BY THE BANKS IN ACCORDANCE WITH THE ISSUES UNDER STUDY. THE QUESTIONS
WERE BOTH CLOSE-ENDED AND OPEN-ENDED.

IN ADDITION TO QUESTIONNAIRE, INFORMATION WAS ALSO GATHERED BY WAY OF ONE-

ON-ONE DISCUSSION WITH THE PEOPLE FROM VARIOUS OTHER DEPARTMENTS OF THE
RESPECTIVE BANKS, ASKING THEIR VIEWS ABOUT THE GIVEN TOPIC.
 DATA COLLECTION
AS THE FOCUS OF THE STUDY WAS THE SITUATION OF SECURITIZATION IN
THE BANKS HEADQUARTERED IN DELHI AND HARYANA REGION, THE DATA
WAS COLLECTED FROM THE RESPECTIVE BANKS. THE REGION OF DELHI
HEADQUARTERS FIVE BANKS:

PUNJAB NATIONAL BANK (PNB) -PUBLIC SECTOR BANK

ORIENTAL BANK OF COMMERCE (OBC) -PUBLIC SECTOR BANK

PUNJAB AND SINDH BANK(P&SB) - PUBLIC SECTOR BANK

CHINA TRUST BANK(CTBC) - FOREIGN BANK

BANK OF TOKYO AND MITSUBISHI - FOREIGN BANK

OUT OF THE BANKS MENTIONED ABOVE, A SAMPLE OF THREE BANKS VIZ PUNJAB
NATIONAL BANK, PUNJAB AND SINDH BANK AND ORIENTAL BANK OF COMMERCE
WAS STUDIED. A WELL DESIGNED QUESTIONNAIRE WAS ADMINISTERED TO ALL THE
THREE BANK RESPONDENTS TO GATHER INFORMATION ABOUT SECURITIZATION DEALS
AND OTHER RELATED ASPECTS.
 ANALYSIS OF
Issue DATAOriental Bank of
Punjab National Bank Punjab & Sindh Bank
Commerce
Active in
Yes Yes Yes
Securitization
Category of loan
NPA NPA NPA
assets sold
Type of securitization ABS & MBS ABS ABS & MBS
Method of Both Single Loan & Both Single Loan & Only Single loan
Securitization Portfolio Approach Portfolio Approach Approach
Increase in Single
Yes Yes Yes
Loan Sell downs
Treatment of
As per RBI guidelines As per RBI guidelines As per RBI guidelines
Profit/Loss
Criterion for • Age of account.
selection of loans to Recoverability Type of loan
• Recoverability.
be sold
• Head office.
Decision making
Head Office Head office • Zonal Offices
authority
( Upto a limit)

RC/SCs, Banks,
Assets sold to RC/SCs Only ARCIL
NBFCs.
Securitization of
No No No
Standard Assets
Types of Securities
None None None
issued
 ANALYSIS OF DATA
(contd…)
Asset-Liability
mismatch due to No No No
issue of PTCs
Securitization deal
with synthetic No No No
structures
Preferred
Geographical Where stamp duties
None None
Location of accounts are least
to be sold

Impact of SARFAESI Positive but only in Positive but only in

Act on Credit case of small and Positive case of small and
Appraisal medium borrowers medium borrowers

Impact of the act on

Positive Positive Positive
Recovery Climate
• Cleaning of • Clearance of
Balance Sheet. • Recovery.
Main motives behind Balance Sheet
• Capital relief • Clearance of
securitization/ sale • Reduction of NPAs
• Resolution of Balance Sheet
• Capital relief
NPAs

• Stamp Duties
• Reserve Price Low price offered by • Stamp duties
Major impediments • Treatment of Non- ARCs • Court Intervention
Funded accounts
T● S
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 ISSUE I – SECURITIZATION OF
STANDARD ASSETS
NOT PRACTICED BY THE BANKS UNDER STUDY.
REASONS CITED
Ø NO INCENTIVE.
Ø ENOUGH LIQUIDITY.

Ø
ADEQUATE CAPITAL.

HOWEVER:
Ø ADEQUATE CAPITAL AT PRESENT WON’T SERVE FUTURE GROWTH
OBJECTIVE.
Ø LIQUIDITY IS A SHORT TERM PHENOMENON.
Ø FUNDS LYING IDLE IN BALANCE SHEETS CAN BE PUT TO BETTER USES.
 ISSUE II – SALE OF NPAs
PRACTICED BY THE BANKS UNDER STUDY.

REASONS CITED
Ø RECOVERY OF BAD DEBTS.
Ø CLEARANCE OF BALANCE SHEET.
Ø CAPITAL RELIEF.
Ø RECYCLING OF FUNDS.

HOWEVER:
Ø USED WITH THE SOLE INTENTION OF
CLEARING BALANCE SHEETS.
 RESULTS
AND
RECOMMENDATIONS
 RESULTS
NO BANK IN THE AREA UNDER STUDY HAS UNDERTAKEN SECURITIZATION OF
STANDARD ASSETS AND ALL OF THE BANKS HAVE UNDERTAKEN SALE OF
DISTRESSED ASSETS ONLY.

IN REFERENCE TO THE SECURITIZATION/SALE OF NPAS, THE AMOUNT OF

SINGLE LOAN DEALS HAS INCREASED CONSIDERABLY.

THE GAINS ON SINGLE LOAN SECURITIZATION/SALE ARE DEALT IN

ACCORDANCE WITH RBI GUIDELINES.

KEEPING IN ACCORDANCE WITH THE RBI GUIDELINES, NONE OF THE BANKS

UNDER STUDY HAS BEEN INVOLVED IN ANY SECURITIZATION STRUCTURE
HAVING EMBEDDED DERIVATIVES OR ANY SYNTHETIC SECURITIZATION
STRUCTURE.
 RESULTS (contd…)
NO INSTANCE OF ISSUANCE OF
PTCS AGAINST
SECURITIZATION OF
STANDARD ASSETS AS SUCH
NO INSTANCE OF ASSET-
LIABILITY MISMATCH CAUSED
 RESULTS (contd…)
MAIN IMPEDIMENTS
FACED BY BANKS FOR
SALE OF NPAs:
Ø STAMP DUTY DISCRIMINATION.

Ø DISPUTE ON RESERVE PRICE.

Ø LESS NUMBER OF ARCs.

Ø UNNECESSARY COURT INTERVENTION IN

RECOVER PROCESS.
 RECOMMENDATIONS
DIRECTON TO PSBs TO INITIATE SECURITIZATION OF STANDARD ASSETS.

DIRCTION TO PSBs TO INSTALL HIGHLY INTEGRATED ACCOUNTING INFORMATION SYSTEMS.

PSBs DIRECTED TO DEVELOP EXPERTS IN THE DIELD OF SECURITIZATION.

MARKET BREADTH AND DEPTH FOR SECURITIZATION DEALS.

INCREASED BY ALLOWING MORE INVESTORS TO PARTICIPATE IN THE SECURITIZED PAPER.

REDUCTION IN STAMP DUTIES .

AMENDMENTS IN TRANFER OF PRPERTY ACT AND STAMP DUTY ACT.

AGRICULTURAL LAND TO BE BROUGHT UNDER PURVIEW OF SARFAESI ACT.

NUMBER OF ARCS INCREASED.

WORKING OF EXISTING ARCs TO BE PUT UNDER SCANNER.

INTRODUCTION OF CMBS.
LIMITATIONS
OF THE
STUDY
 LIMITATIONS
RESEARCH CARRIED WITH VARIABLES ACTING ON RESEARCH
SETTINGS, MAY DIFFER FROM ACTUAL ENVIRONMENT.

DATA COLLECTED FROM INDIVIDUALS WHO ARE HUMANS

AND HAVE TENDENCY TO BEHAVE ARTIFICIALLY WHEN
BEING OBSERVED.

SUBJECTIVITY OF RESPONDENTS.

DENIEL ON PART OF SOME RESPONDENTS TO SUPPLY FIGURES

OF SALE CITING THE REASON OF SIGNING OF NON
DISCLOSURE AGREEMENT WITH THE BUYERS.
BIBLIOGRAPHY
BOOKS:
Ø INTRODUCTIO TO

SECURITIZATION by
“Frank J. Fabozzi and Vinod
Kothari”
Ø CREDIT DERIVATIVES

AND SYNTHETC
SECURITIZATION by
THANKYO
U