The Indian structured finance market and asset-backed in particular is poised for rapid growth in the next two to three years, according to a report this year by Moody's Investors Service

Both Moody's and its Indian affiliate, rating agency ICRA, are expecting the legal environment for securitization to improve, and therefore facilitate the structuring of securitization deals going forward.

The domestic Indian securitization market first began in 1991 with an auto loan securitization by Citibank. Between 1991 and 1997, there were 13 asset-backed programs, all auto loan deals, and four transactions involving other asset classes. The market, however, suffered a setback in 1998, as the auto loan market crashed and a number of nonbanking finance companies defaulted.

Nevertheless, in recent years the market has picked up and has shown record issuance volumes. According to figures compiled by Moody's and ICRA (where the fiscal year in India runs from April to March), in 2001 the market recorded 19 rated transactions, for a total of INR22.6 billion (US$490 million); this was followed in 2002 with 29 rated transactions worth INR40.8 billion (US$884 million). For FY 2003, 46 rated transactions worth a total of INR50.4 billion (US$1.09 billion). That said, during 2002 the total number of originators actually declined, though deal size and deal frequency per issuer increased.

While autos have traditionally made up the bulk of Indian issuance, other asset classes have hit the market, such as MBS, CDOs and partial guarantees.

The captive finance companies have become the largest issuers of securitized debt, using securitization as a tool for acheiving rapid growth, said Moody's. The major companies in this category have become regular issuers in the securitization market. The most popular assets securitized in this particular category of issuers have been commercial vehicle loans, followed by car loans.

Although Moody's and ICRA paint a generally optimistic portrayal of market developments in India, highlighting the milestone of the new securitization law passed in November of last year, analysts said. There is still some needed adjustments that can be made to make the market more user-friendly.

"Although we have yet to do a detailed analysis on the law, we understand that the new securitization law put in place last year could cause some problems to issuers because of the very high capital requirements required at the issuer level," said Neal Shah, vice president at Moody's.

Shah adds that, to his knowledge, no deal yet has been structured using the new law.

There are other obstacles that still need to be resolved, including transfer taxes such as stamp duty, which are high in many states in India, making securitization transactions uneconomical in those particular states. So while some states have reduced these taxes, many continue to set prohibitively high transfer taxes on securitization.

Also, the accounting treatment of securitized assets and subordinate tranches purchased by the originator are under review by the Institute of Chartered Account- ants of India (CAI), which is in the process of preparing guidelines.

Other issues pointed out in the report include the inability of Indian originators with low ratings to achieve the highest ratings on ABS structures, as opposed to what is usual in international ABS. This issue arises because of two constraints in India, including a lack of independent alternative servicers and the commingling of cash flows.

Another challenge is the lack of multiple tranches in deals, which make structures less efficient from the originator's perspective. In fact, most transactions use senior-subordinated structures where the subordinate tranche is retained by the originator.

What are the prospects for cross-border deals to emerge from India? According to Shah, there are reasonable prospects of transactions within the next 12 months. "We had heard of a number of possible deals in the pipeline, such as a mortgage transaction, an export receivables transaction and a CDO, but they have yet not come to fruition," he said.

"You have to remember that the domestic cost of funds are cheap when compared to cross-border securitization, and therefore it might lessen the incentive to do these deals as they are more complex and expensive."

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