PROJECT REPORT ON

Securitisation and its applicability to the NBFCs At

Mumbai
Submitted in partial fulfilment of the requirement for the Award of Post Graduate Diploma in Business Management

Submitted By:
KushagraShrivastava PGDM-BM 2461

Submitted To:
PROJECT GUIDE: Prof. Gaurav Malpani Faculty, FMS-IRM Jaipur CORPORATE GUIDE: Mr.Prashant Gadkari General Manager-Treasury Mahindra Finance Mumbai

Faculty of management Studies Institute of Rural Management, Jaipur

CERTIFICATE
Thisis to certify that the project Report Securitisation and its applicability to the NBFCs is a record of project work done independently by KushagraShrivastava at Mahindra Finance, Mumbai under my guidance and supervision and that it has not previously formed the basis for the reward of any degree, fellowship or association with the same.

Date:

Prof. Gaurav Malpani Faculty FMS-IRM, Jaipur

DECLARATION

I, KushagraShrivastava, hereby declare that this project report entitled Securitisation and its applicability to the NBFCsis a bonafide record of work done by me during the course of summer internship and that it has not previously formed the basis for the award to me, for any degree/diploma, associate ship, fellowship or other similar title, of any other institute/ society.

Date:

Mr Kushagra Shrivastava FMS-IRM, Jaipur Roll No:-2461

ACKNOWLEDGEMENT
This project has helped me acquire essential learning, insights and experiences that have led to an improvement in my knowledge and understanding of Traditional Plans and the pattern of investment in the Insurance industry. This is the result of the dedication of the following people, who have contributed towards the successful accomplishment of this study. I would like to extend my sincere gratitude to my corporate guide for this project, Mr.Prashant Gadkari ,Mahindra Finance, Mumbai for giving me the opportunity to work on this project, which has provided me an insight into various risk and return factors in the insurance industry his valuable experience and constant guidance at every step of the study has been critical and instrumental in the timely and successful completion of this project. I would like to thank the staff at Reliance Securities, Jaipur for their cooperation and support to my study. A heartfelt thank you goes out to my Faculty Guide, Mr.Gaurav Malpani, Faculty, FMSIRM, Jaipur for his valuable guidance, continuous inputs and timely suggestions throughout the project tenure, making it an enriching and smooth learning experiences for me.

KushagraShrivastava FMS-IRM, Jaipur Roll No:- 2461

TABLE OF CONTENTS
SERIAL NO. Chapter1 INTRODUCTION 1.1 Executive Summary 1.2 Objectives Of The Study 1.3 Practical utility of the study Chapter 2 ORGANISATION PROFILE 2.1 Company Profile Chapter 3 RESEARCH METHODOLOGY 3.1 Methodology 3.2 Sources Of Data 3.3 Limitations Of The Study Chapter 4 Securitisation 4..1 Introduction to Securitisation 4.2 Structural diagram of securitisation 4.3 Basic structures of securitisation 4.4 Credit Enhancement 4.5 Process of Securitisation 4.6 Criteria of ratings followed by Rating Agencies Chapter 5 Analysis 5.1Indian Securitisation Market 5.2 Why a company should do securitisation 5.3 Obstacles in Indian Securitisation Market Chapter 6 CONCLUSION AND SUGGESTIONS 6.1 Conclusion 6.2 Suggestion Chapter 7 ANNEXURES 7.1 RBI Guidelines on Securitisation Chapter 8 BIBLIOGRAPHY CONTENTS PAGE NO.

Chapter 1

1.1 EXECUTIVE SUMMARY

With the capital market going through a lean phase and companies increasingly facing funding problems, the focus is now on raising money through securitisation. Securitisation, in its most basic form, is the repackaging of asset cash flows into securities. It means legally isolating sources of cash flow from avoidable risk, and issuing debt backed by this revenue. This debt can then be placed in the public-listed debt security market or privately. The increasing focus on securitisation has been furthered by the announcement from the finance ministry that the Government has plans to fund power companies through receivables due from State Electricity Boards (SEB). Given the size of SEB dues owed to power companies running into thousands of crores the deals, when they are through, could create a huge base of securitised instruments. The National Housing Bank is taking the initiative so that housing finance companies can raise money by issuing bonds backed by future loan receivables. And with the capital market in dumps, it could be the answer for large corporations that are facing funding problems. However, the picture is not yet so clear and time alone will tell if Indian markets make the best utilization of securitisation and reap rich benefits from it. But there is hope of great improvements in the market place. Worldwide, anything that can generate a cash flow can be securitised. If you can imagine an asset that produces a cash flow, or can be made to produce a cash flow, it is probably supporting an asset-backed security (ABS) somewhere right now.

1.2 OBJECTIVES

The primary objective of the study is to analyse and study the concept of securitisation in detail. As in the present scenario the organizations are facing the problems of raising funds and securitization is one of the many possibilities to solve such problem. Therefore my objective was to study the practical aspect of the structures of securitisation. As different organisations follow different types of structures so it was important to find the reasons for selection of a particular structure by an organization.

The following are the major objectives of my project:1) To understand the conceptual framework of the securitisation. 2) To understand the operational mechanism in practice. 3) To analyse the problems and prospects of securitisation in India. 4) How the originator is deriving the benefits out of securitisation. 5) Reasons why securitisation is not so popular in Indian Financial Markets.

1.3 PRACTICAL UTILITY OF THE PROJECT

The main purpose of conducting such type of study is to know the current scenario of the Securitisation market in India. As securitisation is not so popular in Indian financial markets instead of having benefits gained by the originator therefore an urgent attention was needed just to know the causes. The process of securitisation is not known by most of the general public therefore there is a need to explain its entire process.

CHAPTER 2

2.1PROFILE OF THE ORGANIZATION

MAHINDRA [MMFSL]

AND

MAHINDRA

FINANCIAL

SERVICES

LTD.

MMFSL is one of the leading non-banking finance companies (NBFCs) with customers on Rural and semi-urban markets of India. It is a part of Mahindra Group, which is one of the largest conglomerates of India. They are primarily engaged in providing financing for new and pre-owned auto and utility vehicles, tractors, cars and commercial vehicles. They also provide housing finance, personal loans, financing to small and medium enterprises, insurance broking and mutual fund distribution services. It was incorporated in 1991 and commenced operations as a finance company in 1993.It was registered as a deposit-taking NBFC in 1998 and since established a pan-India presence, spanning 24 states and four union territories through 628 offices as of September 30, 2012.

VISION:
Their Vision is to be the leading rural finance company and continue to retain the leadership position for Mahindra products.

GOALS:
Their goal is to be the preferred provider of financial services, across the rural and semiurban areas of India.

STRATEGY:
Their strategy is to provide a range of financial products and services to our customers through our nationwide distribution network.

SWOT Analysis of mahindra Finance

STRENGTHS
Mahindra Finance has advantage of brand name of Mahindra &Mahindra Group.

Mahindra Finance has large asset base of Rs.5000 crores. It has large distribution channels with 350 branches all over the nation. Company has large financial base as its IPO was subscribed 26.88 times.

WEAKNESSES
Mahindra Finance provides advisory service and they do not have share broking facility which their competitors have. Mahindra Finance is not known to the people. Mahindra Finance does not make advertisement of its product.

Opportunities
Mahindra Finance has entered into mutual fund distribution which is growing as per Indian market development Automobile sector in India is growing as foreign companies entering in India which is useful for Mahindra Finance as it provides vehicle loans Mahindra Finance helps individuals in making financial planning which is most profitable in as investment trend is changing in India.

Threats
The biggest threat for Mahindra Finance in the market is new entry of foreign non-banking financial institutions. In case of vehicle financing company has tough competition from large banks like State Bank of India, ICICI etc.

Subsidiaries of Mahindra Finance

1) Mahindra Insurance Brokers Limited (MIBL)

Mahindra Insurance Brokers Ltd. (MIBL), provides 360o insurance solutions, tailor-made for the diverse needs and risk profiles of our varied consumer base. While providing direct insurance broking for the retail customer base of around 1.3 million and catering to a large number of corporate customers, the company also offers a range of plans for the Life as well as Non-life insurance segments. MIBL is committed to provide value to its customers by understanding their insurance needs and risk profile in a highly detailed and systematic manner. This helps in chalking out more innovative, cost-effective and customised insurance solutions. And its uncompromising adherence to the highest standards of quality is evident from the fact that it is one of the few insurance broking companies in India to have been awarded the prestigious ISO 9001:2008 Certification for Quality Management Systems. MIBL was granted a Direct Broker's Licence by the Insurance Regulatory and Development Authority (IRDA) in May 2004, enabling it to undertake direct insurance broking in Life and Non-life businesses. In addition, MIBL has empanelled itself with various public and private insurance companies to fulfil its promise of delivering customised solutions to customers. In September 2011, MIBL was granted a Composite Broker licence by the IRDA, thus foraying into the Reinsurance Broking business along with Direct Broking. As a Total Insurance Risk Solutions provider, MIBL also plays an integral role in the Risk Management portfolio of customers.

Vision:

"To be India's no.1 Insurance Broker in revenue by 2015."

2) Mahindra Rural Housing Finance Limited (MRHFL)

MRHFL, India's largest rural housing finance company, was incorporated with an objective to transform the rural and semi-urban landscape by providing cost-effective and flexible home loans. So be it home construction, purchase, extension or improvement, MRHFL provides loans for most home finance requirements. Today, it successfully serves over 1 lakh customers and operates in more than 17,500 villages across states like Maharashtra, Madhya Pradesh, Rajasthan, Gujarat, Bihar, Andhra Pradesh, Tamil Nadu, Karnataka and Kerala. In fact, MRHFL has been responsible for some major transformations in rural India. People in the remote villages have very little chance of getting loans from established financial institutions due to lack of documents. And local money lenders prove too expensive. This is where MRHFL comes into the picture and provides affordable home loans with minimum documentation. It has facilitated the upgradation of many 'Kuccha' and unstable structures made of mud to 'Pucca' houses made of bricks and mortar, changing the flooring of houses from rough cement base to tiles. In short, huts have turned into homes, and dreams into realities.

A subsidiary of MMFSL, Mahindra Rural Housing Finance was incorporated on April 9, 2007 and obtained a certificate of registration to commence the business of a Housing Finance Institution from the National Housing Bank on August 13, 2007. Mahindra & Mahindra Financial Services Limited (MMFSL) holds 87.5% of the equity of MRHFL and the National Housing Bank (NHB) holds the remaining 12.5%. NHB, in turn, is a fully owned subsidiary of the Reserve Bank of India (RBI).

Mission:

"Transforming rural lives. Together"

CHAPTER 3

3.1METHODOLOGY

As my project is Descriptive in nature therefore I have to mostly rely on the Secondary data sources instead of primary sources. But I have included both Primary Data as well as Secondary Data for the better understanding of the concept.

3.2SOURCES OF DATA

1) Primary Data Collection

As there is very little source for the collection of the primary data in Securitisation therefore I have very few Primary Sources. a) ObservationI critically examined the practicle aspect of the securitisation process. I observed the working as how the securitisation process gets started and eventually comes to completion.

b) Internal personnelI took help from the personnel of treasury department of the Mahindra Finance for better understanding of he concept.

c) External personnelI had meetings with the employees of reputed credit rating agencies such as FITCH and CRISIL. It had helped me in advanced understanding of securitisation process and its practical applicability to the NBFCs.

2) Secondary Data Collection

a) BooksI have referred to 2 books on securitisation by well-known authors. Securitisation: A Primer By Arnab Chowdhury Securitisation: A financial instrument of the new millennium By Vinod Kothari

b) InternetI have referred to various internet websites and forums for getting the knowledge of my topic. Visiting the various companies websites which are dealing in securitization.

c) RBIs Latest Guidelines on Securitization

[Discussed in the Annexure below]

3.3LIMITATIONS OF THE PROJECT

There were few limitations of the project which are as follows

1) Time constraintAs the internship was about of only 45 days and the securitisation is a very vast topic to cover therefore I had to complete the research in the prescribed time only.

2) Lack of knowledge in general publicAs securitisation is a much specialised topic therefore only few people had the thorough knowledge of the topic.

3) ConfidentialityAll the data and the terms and conditions included in the securitisation transaction is kept confidential therefore it was very difficult as a researcher to find new things.

Chapter 4

4.1 INTRODUCTION

What is Securitisation? Securitisation is a process by which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV. Securitisation thus follows a two-stage process. In the first stage there is a sale of single asset or pooling and sale of pool asset to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. In the second stage repackaging and selling the security interests representing claims on incoming cash flows from the assets or pool of assets to third party investors by issuance of tradable debt securities. In others words,it is the process by which, financial assets such as household mortgages, credit card balances, hire-purchase debtors and trade debtors, etc., are transformed into securities. In present day capital market usage, the term is implied to include securities created out of a pool of assets such as household mortgages, credit card balances, hire purchase debtors and trade debtors, other receivables, etc., transferred, fully or partially, which are put under the legal control of the investors by the owner (the Originator) in return for an immediate cash payment and/or deferred consideration through a Special Purpose Vehicle(SPV) created for this purpose.

BASIC STRUCTURE
In its simplest form a Securitization involves (1) the sale of a large pool of Receivables by an entity (Originator) that creates such Receivables (or purchases the Receivables from entities that create them) in the course of its business to a "bankruptcy-remote," special purpose entity (SPE) in a manner that qualifies as a "true sale" (vs. a secured loan) and is intended to achieve certain results for accounting purposes, as well as protecting the Receivables from the claims of creditors of the Originator, and (2) the issuance and sale by the SPE (Issuer), in either a private placement or public offering, of debt securities ( Securities) that are subsequently satisfied from the proceeds of and secured by the Receivables. When the Securitization is "closed," funds flow from the purchasers of the Securities (Investors usually banks, insurance companies and pension funds) to the Issuer and from the Issuer to the Originator. All of these transactions occur virtually simultaneously.

Originator
the entity that either generates receivables in the ordinary course of its business, or purchases or assembles portfolios of Receivables (in that sense, not a true "originator"). Its counsel works closely with counsel to the Underwriter/Placement Agent and the Rating Agencies in structuring the transaction and preparing documents and usually gives the most significant opinions. It also retains and coordinates local counsel in the event that it is not admitted in the jurisdiction where the Originator's principal office is located and in situations where

significant Receivables are generated and the security interests that secure the Receivables are governed by local law rather than the law of the state where the Originator is located.

Issuer
the special purpose entity, usually an owner trust (but can be another form of trust or a corporation, partnership or fund), created pursuant to a Trust Agreement between the Originator (or in a two steps structure, the Intermediate SPE) and the Trustee, that issues the Securities and avoids taxation at the entity level. This can create a problem in foreign Securitizations in civil law countries where the trust concept does not exist (see discussion below under "Foreign Securitizations").

Trustees
Usually a bank or other entity authorized to act in such capacity. The Trustee, appointed pursuant to a Trust Agreement, holds the Receivables, receives payments on the Receivables and makes payments to the Security holders. In many structures there are two Trustees. For example, in an Owner Trust structure, which is most common, the Notes, which are pure debt instruments, are issued pursuant to an Indenture between the Trust and an Indenture Trustee, and the Certificates, representing undivided interests in the Trust (although structured and treated as debt obligations), are issued by the Owner Trustee. The Issuer (the Trust) owns the Receivables and grants a security interest in the Receivables to the Indenture Trustee. Counsel to the Trustee provides the usual opinions on the Trust as an entity, the capacity of the Trustee, etc.

Investors
The ultimate purchasers of the Securities. Usually banks, insurance companies, retirement funds and other "qualified investors." In some cases, the Securities are purchased directly from the Issuer, but more commonly the Securities are issued to the Originator or Intermediate SPE as payment for the Receivables and then sold to the Investors, or in the case of an underwriting, to the Underwriters.

Underwriters/Placement Agents
The brokers, investment banks or banks that sell or place the Securities in a public offering or private placement. The Underwriters/Placement Agents usually play the principal role in structuring the transaction, frequently seeking out Originators for Securitizations, and their counsel (or counsel for the lead Underwriter/Placement Agent) is usually, but not always, the primary document preparer, generating the offering documents (private placement memorandum or offering circular in a private placement; registration statement and prospectus in a public offering), purchase agreements, trust agreement, custodial agreement, etc. Such counsel also frequently opines on securities and tax matters.

Custodian
An entity, usually a bank that actually holds the Receivables as agent and bailee for the Trustee or Trustees.

Rating Agencies
Moody's, S&P, Fitch, IBCA and Duff & Phelps. In Securitizations, the Rating Agencies frequently are active players that enter the game early and assist in structuring the transaction. In many instances they require structural changes, dictate some of the required opinions and mandate changes in servicing procedures.

Servicer
The entity that actually deals with the Receivables on a day to day basis, collecting the Receivables and transferring funds to accounts controlled by the Trustees. In most transactions the Originator acts as Servicer.

Backup Servicer
The entity (usually in the business of acting in such capacity, as well as a primary Servicer when the Originator does not fill that function) that takes over the event that something happens to the Servicer. Depending upon the quality of the Originator/Servicer, the need and

significance of the Backup Servicer may be important. In some cases the Trustee retains the Backup Servicer to perform certain monitoring functions on a continuing basis.

True sale
Simply structuring the securitised vehicle to the bankruptcy remote does not ensure that its assets will be scheduled from those of the seller in the event that the seller becomes the subject to a bankruptcy proceedings. The transfer of the underlying assets must be an absolute assignment, or true sale, of those assets. The transfer of those assets must, therefore constitute a sale for accounting purposes to assure that the securitisation vehicle will be entitled to future cash flows from the receivables even if the seller becomes bankrupt.

4.2 STRUCTURAL DIAGRAM

Asset Backed Securitisation

ABS in its basic form consists of the pooling of a group of homogeneous loans, the sale of these assets to special purpose company or trust, and the issue by that entity of marketable securities against the pooled assets. The payment of interest and principal on the securities is directly dependent on the cash flows arising from the underlying pooled assets. ABS is a process that creates a series of securities which is collaterised by assets mortgaged against loans, assets leased out, trade receivables, or assets sold on hire purchase basis or instalment contracts on personal property.

Mortgage Backed Securitisation

The securitisation of assets historically began with, and in sheer volume remains dominated by residential mortgages. The receivables are generally secured by way of mortgage over the property being financed, thereby enhancing the comfort for investors. This is because mortgaged property does not normally suffer erosion in its value like other physical assets through depreciation.

4.3 BASIC STRUCTURES OF SECURITISATION

1) Par Structure
In a par structure, the consideration paid by the investors for the PTCs is equal to the pool principal. The monthly principal repayment promised to the investors is the same as that to be received from the underlying pool. However, the yield earned on the outstanding pool principal is generally different (pool yield is usually higher) from that payable to the investors on the balance PTC principal. Thus, the total cash flows receivable on the pool is higher than the amount payable on the PTCs. This difference is termed as Excess Interest Spread. (EIS) While this amount typically belongs to the Originator, its claim on the EIS is subordinated to that of the PTC holders; thereby the EIS functions as a source of credit enhancement.

2) Premium Structure
In a Premium structure, the pool cashflows are discounted at the PTC yield and such discounted value is paid by the PTC holders as consideration. Unlike par structures, in a premium structure, instead of the principal, the cashflows receivable (from the pool) are matched on a month on month basis with the cashflows payable (to the PTCs). The PTC yield is lower than the pool yield, so the pool cashflows discounted at the PTC yield is higher than the pool principal. This difference between the discounted cashflows and the pool principal is the premium paid by the investors.

Pool Features Tenure Pool Principal Pool IRR Pool Cashflows Investor Yield PTC Consideration PTC Cashflows

Par Structure 3 years Rs. 1,000.0 mn 12.00% Rs. 1,185.2 mn 10.0% Rs. 1,000.0 mn Rs. 1,155.6 mn

Premium Structure 3 years Rs. 1,000.0 mn 12.00% Rs. 1,185.2 mn 10.0% Rs. 1,029.6 mn Rs. 1,185.2 mn

Pool Pricipal=PTC Principal EIS= Pool CashflowPTC Cashflow Rs. 29.6 mn

Pool Pricipal=PTC Principal Nil

4.4 CREDIT ENHANCEMENT

Credit Enhancement is provided to the SPV to cover the losses associated with the pool of assets. The rating given to the securities issued by the SPV (PTCs) by a rating agency will reflect the level of enhancement. It accomplishes two goalsa) It provides a source of funds to supplement payments on the underlying assets in the event collection on the assets is insufficient to pay schedule interest and/or principal. b) It allows the different tranches within the securitisation to achieve the desired ratings, even in the cases where asset originator or the asset cannot support such a rating.

Credit Enhancement comprises of the following-

1) Opening Overdues
It is the amount due from the obligors, if realised from the obligors on any future date shall be deposited by the servicer in the Collection and Payout Account and form part of the Credit Enhancement.

2) Excess Interest Spread

Spread refers to the difference between the amount of interest received on the assets and the amount of interest to be paid on the securities that have been issued by the SPV. If there is excess spread, i.e more net interest income than is required to meet the expenses of the SPV, than an element of reserve funds begin to accumulate. These reserve funds can be used in the event of default by one of the assets in the pool.

3) Cash Collateral
It means the facility to be provided/ caused to be provided be the Cash Collateral Provider, which shall be in the form of Fixed Deposits, which Cash Collateral shall provide protection to any shortfalls in the monies available to meet the Investor payouts, arising on account of differences between the billed amounts and the amount collected towards the same, or on account of prepayment. The cash collateral is being in the form of fixed deposits placed in the cash collateral account by cash collateral provider.

4.5 PROCESS OF SECURITISATION

STEP 1 The originator either has or creates the underlying assets,that is, the transaction receivables out of which are to be securitised.

STEP 2 The originator selects the receivables to be assigned.

STEP 3 A special purpose entity is formed.

STEP 4 The special purpose company acquires the receivables, at their discounted value.

STEP 5 The SPV issues securities, either back to the originator who then takes it to the market, or to investors either Debt type securities or beneficial interest certificates. These are publicly offered or privately placed, as found conducive.

STEP 6 The Servicer for the transaction is appointed, normally the Originator.

STEP 7 The Debtors of the Originator or obligator are/ are not notified depending on the legal requirements of the country concerned. Most likely, the Originator will try to avoid notification.

STEP 8 The Servicer collects the receivables, usually in a Escrow Mechanism, and plays off the collection to the SPV.

STEP 9 The SPV either passes the collections to the investors, or reinvests the same to pay off to investors at stated intervals.

STEP 10 In case of any default, the Servicer takes action against the Debtors as the SPVs agent.

STEP 11 Only when the small amount of outstanding receivables is left to be collected, the Originator usually cleans up the transaction by buying back the outstanding receivables.

STEP 12 At the end of the transaction, the Originators profit, if retained and subject to any losses to the extent agreed by the Originator, in the transaction paid off.

4.6 Criteria of Credit Ratings given by rating agencies

Before the private or public offering of securities, credit rating agencies provide their opinion on the likelihood that the issuing SPV will be able to pay both principal and interest on the securities when due. The rating usually covers not only any buyer-specific risk of default, but also price risk and market risk, taking into consideration several factors, such as the: a) Type of assets underlying the securitisation. b) Transaction structure c) Waterfall of payments (in particular).

The criteria serving as the basis of the rating agencies analysis are often published, which indirectly gives rating agencies considerable authority in relation to the structure of the transaction. Following are the criteria followed by rating agencies for giving the credit ratings to a PTC-

1) Assets Analysis 2) Liability Analysis 3) Counterparty Risks 4) Transactional and Legal structures

CHAPTER 5

5.1 INDIAN SECURITISATION MARKET

Issuance volume in the Indian securitisation market was Rs.36, 603crores in FY2012, a growth of 15% over the previous fiscal. The increase in volume following a continuous decline for three yearswas on account of a 26% rise in securitisation of retail loans (both Asset-Backed Securitisation or ABS, and Residential Mortgage-Backed Securitisation or RMBS, cumulatively). As per the Master Circular by the RBI for Lending to Priority Sector released in July 2011, loans by banks to NBFCs no longer qualify as Priority Sector Lending (PSL); post this change in regulation there was only one major way in which banks could meet their shortfall in priority sector lending targets, viz., acquisition of compliant portfolios from NBFCs. On the other hand, Originators (read NBFCs) motive in entering into these transactions was a finer pricing, capital relief and tenure-matched funding, apart from keeping open an alternate fund-raising channel. This led to a rise in transactions involving bilateral assignment of retail loan pools mainly including loans to Small and Medium Enterprises (SMEs) or Small Road Transport Operators (SRTOs) and micro creditespecially during the last quarter of the year. Bilateral assignmentsaccounting for around 75% of ABS and RMBS volume in Indiacontinued to be the preferred route relative to conventional securitisation, given that these transactions were not covered by RBIs guidelines of Feb 2006 on securitisation, thus making them less restrictive for Originators.

Asset Backed Securitisation

The number of ABS issues increased significantly by 58% in FY2012 by 178 transactions. However in value terms, the increase was only 19% over the FY2011. The average deal size was lower at Rs.146 crores in FY2012 as compared to Rs.193 crores in FY2011. This was on account of higher number of Microfinance transactions executed in FY2012 at 65 that was about twice the issuance in FY2011 at 34.

The total number of issuers in the ABS space increased from 23 to 33 as some microfinance entities entered the securitisation (or assignment) market. Shriram Transport Finance Company, SREI Equipment Finance, Indiabulls Financial Services Ltd., Sundaram Finance and Shriram City Union Finance were the largest Originators in FY2012, altogether contributing to over 60% of the total number of ABS issuances. Banks continued to be absent from the securitisation market as Originators (although they continue to be a key investor segment).

Commercial Vehicle (CV) / Construction Equipment (CE) loans continue to dominate ABS space
Given that the key motive for the Assignees to enter into the transactions was mainly to meet PSL targets, the underlying asset categories were those that would qualify as PSL

In FY2012, CV and Construction Equipment (CE) loans continued to be the key asset class accounting for two-thirds of the total ABS volumes. The long and relatively stable track record of CV / CE lending in the country (also demonstrated through good performance of the past pools) and the relatively larger size of CV / CE loan portfolios in the industry have been the key factors for the popularity of this asset segment in securitisation. Microfinance and SME loans, which had a small share in securitisation in the previous years emerged as the other key loan categories to be securitised accounting for almost 11% each in FY2012 from about 7% and 2% in FY2011. However, there was some securitisation of Two Wheeler loans in FY2012, a segment absent during the previous two years.

Residential Mortgage-Backed Securitisation RMBS issuance grows in FY2012

The number of RMBS issuances increased to 22 in FY2012 along with an increase of 53% in value terms. However, the average deal size marginally reduced to Rs.349 crores in FY2012 from Rs.359 crores in FY2011. RMBS segment continued to be highly concentrated with HDFC and Dewan Housing Finance, which together contributed to about 85% of all issuances.

5.2 WHY A COMPANY SHOULD DO SECURITISATION?

1) The cost of raising the funds through securitisation is always less than the cost of funds raised through other sources. 2) Securitisation helps in raising funds at a rating higher than what is the actual rating of the originator. 3) After securitisation the securitised assets (receivables) go off the balance sheet of the originator. This is especially helpful in the banking industry which has to adhere to capital adequacy norms.

5.3 SECURITISATION IN INDIA: OBSTACLES

There are many hindrances which are faced by the Indian Companies while having the securitisation done in the Indian Market. These Hindrances are the prime reasons for slow evolvement of securitisation in Indian Market. Following are the most prominent obstacles of securitisation:1) Stamp duty on transfer of assets by originator to the SPV is as high as up to 13% . 2) If PTCs are issued in the form of a receipt, it is not transferable by endorsement and delivery; if PTCs are issued in the form of promissory note then it will attract Stamp Duty.

CHAPTER 6

6.1 CONCLUSIONS

The detailed study on the topic of securitisation and gaining the practical knowledge has helped me in the better understanding of the topic. It has helped me in the fulfilment of objects of my study. After completing the Internship now I have the proper idea of Securitisation and its practical aspects. Though retail loan securitisation improved in FY2012, the issuance volume in India continues to remain subdued and concentrated among few Originators. Around 75% of the market in FY2012 was essentially bilateral loan pool trading, driven by the economics of priority sector lending targets. It follows that the investor segment is largely banksmainly private sector and foreign banks. Mutual Funds have mostly been absent from the securitisation market for a variety of reasons, the latest being the unresolved issue of income tax authorities claim on taxing the income from securitised instruments.

6.2 SUGGESTIONS

The final guidelines on securitization and bilateral assignments are expected to result in a significant decline in volume of bilateral assignments given the prohibition on credit enhancements by Originators in these transactions13. The other key factors that will largely shape the course of securitisation of retail asset loans going forward are the extent to which the Nair committee recommendations are adopted and also the legal stance on the taxation of PTCs. In addition to regulatory prescriptions, the pace of growth in loan book size among key players would continue to be a basic determinant of level of securitisation activity.

CHAPTER 7

Annexure:

7.1 RBIS LATEST GUIDELINES

RBI has issued a guideline on securitisation in 2012 covering many aspects in order to prevent unhealthy practices surrounding securitisation viz; origination of loans for the sole purpose of securitisation and in order to align the interest of the originator with that of the investors and with a view to redistribute credit risk to a wide spectrum of investors, it was felt necessary that originators should retain a portion of each securitisation originated and ensure more effective screening of loans. Below are some of the topics covered in the latest guideline-

1) Minimum Holding Period (MHP)

Securitisation markets have over the last 12 seen a positive shift in the credit quality of underlying pools. This has been on account of the regulatory requirement for all loans in a securitisation pools to have an MHP

2) Minimum Retention Requirement(MRR)

To ensure that originators have a continuing interest in their securitisations, RBI has also introduced a minimum retention requirement (MMR) directing them to invest between 5%-10% in the cash collateral and other tranches issued.

Chapter 8

8.1 BIBLIOGRAPHY

1) Securitisation: A Primer By Arnab Chowdhury 2) Securitisation: A financial instrument of the new millennium By Vinod Kothari 3) www.rbi.com 4) www.icra.com 5) www.indiaratings.co.in 6) www.vinodkothari.com