Where’s the cash?

Mumbai, July 25: Interest rate uncertainties have affected the securitisation plans of banks with new issues drying up and investors not warming up to instruments such as mortgage-backed securities.

The last full-fledged issue of Rs 82-crore mortgage-backed securities was by IDBI Bank in March. “The only mortgage-backed securities issue which I can think of is that from ICICI Bank, which was a short-term instrument with put and call options at regular intervals,” a senior official from a leading private sector bank said.

Bank analysts largely blame the uncertainty in interest rates for this development, even as they add that investors have turned cautious since the elections and the subsequent change in government.

Securitisation is the process of converting cash flows into marketable securities. These are referred to as asset-backed securities. Mortgage-backed security is based on a pool of underlying mortgages. Though securitisation has increased in the country in the past few years, illiquidity remains the main constraint. This has led to the securitised paper commanding a premium over corporate debt.

Sources said given the illiquidity associated with securitised paper, investors are not willing to invest at a particular interest rate when they feel that it may go up.

“It is now difficult to take out structured finance in the market, though disbursement of commercial credit is on the rise. Liquidity was anyway an issue. Now we have the uncertainty over interest rates. Therefore, the mortgage-backed securities market is now virtually dormant,” sources added.

It is felt that there won’t be any large mortgage-backed securities issue at least till September, when a clearer picture on interest rates is expected.

Banks, in the meantime, are considering floating rate issues that will be linked to external benchmark such as government securities. At present, there are floating rates for asset-backed securities, while this is absent in the case of mortgaged-backed ones.

IDBI Bank structured finance head V. Srinivasan told The Telegraph that the private sector bank is considering such a floating rate issue. Though its size is yet to be fixed, Srinivasan hinted that it could be in the range of Rs 100-150 crore.

Sources said a major positive in recent times is the interest shown by State Bank of India (SBI) in subscribing to such a paper.