Indian securitisation market is solid despite global meltdown

December 3, 2008: A study by CRISIL reveals that the retail securitisation market in India is better placed than it is in many other countries, notably the US. The size difference notwithstanding, the Indian market—which is less than one–hundredth the size of the US market—has shown greater stability, with few rating downgrades, and zero losses on investor payouts. CRISIL believes that the relative stability is because of the superior profile of the assets securitised in India, and because the financial instruments created out of the securitised assets in India are far less complex than those in developed markets. Investors in securitised paper in India have no reason to fear crippling losses of the kind that have hit their US counterparts.

The most significant factor characterising securitisation in India is the robustness of the underlying retail assets. Unlike in the US, there has been no securitisation of ‘sub-prime’ housing loans in India. The loans that have been securitised—principally loans for commercial vehicles, cars, two-wheelers, and (to a limited extent) homes—were made on the strength of the earning capacity of the either the assets or the borrowers. Thus, unlike the US market which turned out to be vulnerable to residential property price movements, the securitisation market in India is relatively immune to asset price fluctuations.

Moreover, although the collection behaviour of retail loans has worsened somewhat over the past two years, CRISIL has stipulated higher credit enhancement levels to counteract this trend. Recent car and commercial vehicle pools have had collections that are, on average, two percentage points lower than those on older pools at a similar stage in their life-cycle. Against this, on average, credit enhancement levels have risen by 2.5 to 4.5 percentage points, an increase of more than 50 per cent, over the past two years. According to Mr. Prasad Koparkar, Head, Structured Finance Ratings, CRISIL, “There will probably be more rating changes than before, but thanks to higher levels of credit enhancement, investors’ payouts are still well protected from default.

Reassuringly, despite a few rating downgrades in the past few months, the stability of CRISIL’s securitisation ratings is comparable to that of its other ratings. According to Mr Ajay Dwivedi, Director, Structured Finance Ratings, CRISIL, “From the highest rating of ‘AAA(so)’ for structured instruments, only about two per cent of instruments have been downgraded over a oneyear timeframe. This is quite comparable with the behaviour of CRISIL’s ‘AAA’ ratings for other instruments.” Nevertheless, CRISIL continues its globally pioneering practice of differentiating its ratings for structured instruments from its ratings for other instruments, by using the ‘(so)’ suffix.

Global regulators today are discussing a requirement to differentiate ratings on structured instruments from those on plain vanilla debt; the fact that CRISIL took this step more than a decade ago shows how transparent and market-friendly credit rating in India is.

(This is press release of Crisil)

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