Securitisation market looks up after 2 years of decline

After two years of decline, securitisation market is looking up, thanks to new investment structures like commercial mortgage-backed securitisation and future-flow securitisation because these entailed investing in non-convertible debentures (NCDs) rather than pass through certificates (PTCs), which remained under a tax fog.

A study by Crisil suggests that total securitisation volumes edged up 3.3% in financial year 2014-15 to Rs 43,500 crore in fiscal 2015 from Rs 42,100 crore in 2014. While traditional asset classes lagged (volumes for ABS and MBS issuances decreased by nearly 7%), new securitisation structures lent support, contributing Rs 4,200 crore, or around 10% to the overall volumes.

Securitisation, or pooling of loan assets and selling that to raise funds — a key route to meet priority sector norms for private and foreign banks — had turned costlier with distribution tax on investors.

Non-banking finance companies raise funds by securitising loan portfolios. The process has been restricted to a large extent after the Reserve Bank of India (RBI) laid out rules. In 2012, RBI barred banks from taking credit enhancements in bilateral transactions so banks were left with taking the special purpose vehicle route where they had to pay distribution tax. Other than tax, cap on minimum holding period and minimum retention limits also restricted the securitisation market.


Later in 2013, to provide clarity on taxation of securitisation trusts — through which PTCs are issued — the Finance Act introduced tax on income distributed by such trusts saying the levy will depend on the tax status of the end-investor. As a result, trusts where mutual funds are investors were exempted.

Direct Assignments became more prevalent during the previous financial year and new investment structures gained currency as RBI relaxed norms on credit enhancements.

Banks were buying a large part of the securitised portfolio through the PTC route to meet their priority sector lending (PSL) targets and show growth in advances. But as part of the revised norms, they were liable to pay tax on these accounts and they moved towards direct assignments.
With the RBI increasing priority-sector lending targets for foreign banks, introducing sub-targets and quarterly assessment of these targets are expected to improve securitisation volumes.





However, new asset classes such as medium enterprises added to the PSL list.