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Part - II

With the help of securitization transaction, an originator can transfer the credit and other risks associated with the pool of assets securitized. Securitization can provide much needed liquidity to an Originator’s balance sheet; help the originator churn its portfolio and make room for fresh asset creation; obtain better pricing than through a debt-financing route; and help the originator in proactively managing its asset portfolio. Securitization allows investors to improve their yields while keeping intact or even improving the quality of investment.

Securitization in India

As of June 30, 2001, the outstanding securitized assets in the US were over USD 5 trillion (ABS - USD 1.2 trillion, MBS - USD 3.8)[3], a staggering 25% of all debt outstanding. For India, this figure is a paltry 1.6% with less than INR 100 billion of outstanding securitized debt. [3]

While there has been a lot of discussion about the potential of securitization in India, actual deal activity has not kept pace. While some early adopters like ICICI, TELCO and Citibank have been actively pursuing securitization, almost all the transactions in the market so far have been privately placed with a majority of them being bilateral fully bought out deals.

Lack of appropriate legislation and legal clarity, unclear accounting treatment, high incidence of stamp duties making transactions unviable, lack of understanding of the instrument amongst investors, originators and, till recently, even rating agencies are some of the glaring reasons for the lack of activity in the area of securitization in India.

Need for Securitization in India

The generic benefits of securitization for Originators and investors have been discussed above. In the Indian context, securitization is the only ray of hope for funding resource starved infrastructure sectors like Power *. For power utilities burdened with delinquent receivables from state electricity boards (SEBs), securitization seems to be the only hope of meeting resource requirements. As on December 31, 1998, overall SEB dues only to the central agencies were over Rs. 184 billion [1].

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* According to reports, the power sector in India needs a funding of about USD 17 billion over the next 10 years [1].

Written by V. Sridhar, PGP 2002, IIM Calcutta.
Contributed by Varun Goenka, Diploma in Business Finance Economics, ICFAI.