Securitization

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Q3 ) Find out a company that has gone for securitization. Analyze its reporting on securitization and give suggestions to improve its communication to stakeholders regarding impact of securitization on the company?

Securitization market in India is almost muted in because of following factors

1.RBI guidelines in May 2012 where purchasing banks has to go for entire credit risk on the assigned portfolio rather than going for any credit enhancement technique like Credit trenching, Over-collateralization, Cash collateral, etc. This increase bank risk and they will less interest to buy securitization products from originators NBFCs in this case. 2.Taxation of income generated though (Pass though certificates) PTCs is a major concern (matter that is sub-judice). Pending clarity on the issue, Mutual Funds—as well as several banks—are staying away from making fresh investments in PTC instruments

Over view of Securitization Market in India is as follows

One company that has gone for Securitisation in 2012 in India is SKS Microfinance Limited. SKS Microfinance Limited (SKS) is a non-banking finance company (NBFC), regulated by the Reserve Bank of India. SKS' mission is to eradicate poverty by providing financial services to the poor. The company operates across 19 of 26 Indian states.

Market details for the company are as follows

SKS plans "to serve 50 million households across India and other parts of the world and also to create a commercial microfinance model that delivers high value to our customers". The theory is that providing financial services to low-income households helps alleviate poverty.

SKS Microfinance offers 8 financial products and services to its clients - Income Generation Loans, Mid-Term Loans, Mobile Loans, Sangam Store Loans, Housing Loans, Funeral Assistance, Gold Loan, and Life Insurance. The company lists some of the social benefits of its financial product and service offerings as "providing self-employed women financial assistance to support their business enterprises, such as raising livestock, running local retail shops called kirana stores, providing tailoring and other assorted trade and services”.

Considering the nature of operations by SKS Microfonance they need high amount of liquidity to keep their mortgage cycle running. Securitization is one of the key tools they use to maintain that liquidity.

In February 2012 SKS Microfinance raised Rs. 354 crores through securitization.

Analyzing the Annual report of SKS microfinance following communication was shared by them w.r.t. Securitization

Revenue recognition Section
In accordance with the RBI guidelines for securitization of standard assets, the Company accounts for any loss arising from assignment/ securitization immediately at the time of sale and the profit/ premium arising from securitization is amortized over the life of the underlying portfolio loans/ securities.

Notes to Account
Provisioning policy for portfolio loans and loan assets under assignment/ securitization

Asset Classification and provision policy is as follows

The above-mentioned estimates for the provisioning of the loan portfolio in the state of Andhra Pradesh are based on the asset classification and provisioning norms as prescribed in the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007.

Recommendations to improve communications are
Amount of loan portfolio securitized must be mentioned in the reports •Profits generated from securitization must be clearly mentioned in the report which is not listed. •Income from servicing or securitized loans must be listed separately. •Percentage of receivables securitized must be mentioned clearly. •Fair value disclosures must be listed clearly in annual report •Year wise summary of securitized assets w.r.t. total sales must me mentioned so that investors can get analogy w.r.t. how financing of...
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