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Priority tag on securitised debt

Mumbai, Oct. 7: A committee appointed by the Fixed Income Money Market and Derivatives Association of India wants banks’ investments in securitised debt to be classified as priority sector lending if underlying assets are slotted in the same category.

Headed by State Bank of India (SBI) general manager C. E. S. Azariah, the panel has urged the Reserve Bank (RBI) to extend the benefits of the redefinition to the entire spectrum of securitisation — whether the money is treated by a bank as a loan, an advance or investment. This, it says, will help channel funds into infrastructure — for instance a housing loan can be parcelled away — even if a bank may not lend directly to it.

Banks and financial institutions have been major participants, both as originators and investors in securitised instruments, but the trend is catching on even with firms, many of which have closed small deals. The panel still feels the volume of securitisation transactions is still much below its potential.

“One of the key reasons for this gap is the relative lack of participation in such transactions by more banks. Apart from legal and taxation issues that need to be explained, there is a lack of clarity on key regulatory matters,” the panel said.

The committee pointed to the difference between norms stipulated by the RBI on the composition of an special purpose vehicle (SPV) and provisions of The Securitisation And Reconstruction Of Financial Assets And Enforcement of Security Interest Ordinance, 2002.

The RBI circular on risk weights against housing finance and mortgage-backed securities specifies that the originator of home loans shall not own any share capital in the SPV issuing securitised paper. Also, the originators cannot have directors in an SPV unless there is a majority of independent directors; the originator’s nominees shall have no veto power. By contrast, the Ordinance says no sponsor can hold controlling interest in the SPV. Nor can it have more than half of directors as its nominees. “We recommend that the RBI issue guidelines on the ownership of the SPV in line with the Ordinance,” the panel said.

Securitisation is a financing technique where financial assets owed to the Originator — the entity that originates the financial assets — are pooled and repackaged. It enables the originator to raise off-balance sheet funds by issuing tradable securities, typically in the nature of “pass through certificates” (PTCs). Securitisation begins with the originator segregating financial assets into pools, depending on their credit rating, maturity and interest rate. These pools are then transferred to an SPV, which typically issues pass through certificates to investors.

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