RBI securitisation proposals may hurt market: bankers

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India's nascent securitisation market may be served a death knell if a Reserve Bank proposal to impose a minimum holding period for loans comes into effect, bankers say.

The Reserve Bank of India (RBI) on Monday released proposed rules for securitisation, suggesting, among other things, that banks must hold on to a loan for at least nine months before converting it into a securitised asset.

"The one-year seasoning period for above two-year loans is too long. People don't want to take interest rate risk for such a long period. Loan PTCs (pass through certificates) will be completely out of the window," said Prakash Subramanium, managing director and regional head of capital markets, South Asia, Standard Chartered Bank.

Similarly for loans below two years, the proposed seasoning period of nine months is quite long, Subramanium added.

Securitisation of assets, or bundling together loans into one security which can then be traded, was allowed in India a decade ago and banks quickly turned to it as a means to hedge their interest rate risk.

The central bank, after the financial crisis of 2008, has begun issuing guidelines on derivative products, including asset securitisation.

Bankers said reducing the holding period on corporate loan securitisation to below three months and that for retail to around six months would increase their comfort levels.

"Anyway most banks keep retail loans on their books for about six months before securitising them," a banker said.

Bankers also say RBI rules must ideally differentiate between retail and corporate loans, as the creditworthiness of the former is typically enhanced by adding external collateral while there are generally no such distortions in the latter.

Due diligence

The Reseve Bank has recommended a minimum holding period to ensure that banks do not overlook the due diligence process while extending loans, just because they intend to securitise them, a senior central bank official told Reuters.