A Study on Banks Asset Securitization Problems and Prospects

Asset Securitization is a process where debt products like home loans, auto loans, microfinance loans, and credit card debt are pooled and repackaged as interest-bearing securities. It basically works on the assumption that the probability of several assets defaulting is lower than the probability of defaulting for a single asset. A flaw in structuring the deal could be one of the contributory factors of a failed deal. It could also attract excessive abuse, which consequently will be catastrophic to the financial system. Thus, proper control and regulation of off balance sheet financing is inevitable. The Indian central Government announced the so-called Indradhanush Scheme in 2015, to recapitalize and revamp the functioning of public sector banks. Government has estimated that the additional capital needed over the next few years up to FY 2019 would be about Rupees 1,80,000 crores, and has proposed a budgetary allocation of Rupees70,000 cores to recapitalize banks. Government expected that, “improved valuations coupled with value unlocking from non-core assets as well as improvements in capital productivity, will enable PSBs to raise the remaining Rupees 1,10,000 crores from the market”. Given the magnitude of the NPA problem, capital infusion seems inadequate. Raising of Rupees1,10,000 crores from capital markets after stock market valuations rise due to improved productivity also seems unrealistic. This has led to attempts being made by a few players to get into the Asset Backed Securities market as well.