The Impact of Securitization in Indian Banks

The Impact of Securitization in Indian Banks

Abstract

The banking sector is critical to a country's economic growth because it mobilizes deposits and directs money to productive areas. Banking assets of developing countries, including China, India, Brazil, Russia, Mexico, Indonesia, and Turkey, are expected to surpass those of G7 economies by 2050, with India becoming as the world's third biggest domestic banking market in the next three decades. We are aware that India has a bank-based financial system in which banks and financial institutions serve as the primary intermediaries for commercial sector lending. However, lax project assessment, political factor mongering, and inaccurate predictions of future industry demand, along with the recent recession, have resulted in the default of numerous bank accounts, resulting in non-performing assets.

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Introduction

From 2017 to 2022, India's infrastructure would need about Rs43 trillion in investment. The infrastructure sector's debt need is estimated by CRISIL to be Rs30 trillion. Globally, institutional investors generally fund infrastructure, with corresponding long-term obligations and risk–return expectations; in India, banks have been the primary source of infrastructure financing. However, India's banking industry is under strain, as banks are exceeding their exposure limitations in infrastructure financing due to bad loans and low profitability. The issue is particularly severe among public sector banks (PSBs). Since 2016, PSBs have amassed almost 88 percent of the banking sector's nonperforming assets (NPAs), compared to their 70 percent asset base. 

The new Basel III requirements for bank capital, which will be completely implemented by 2019, will exacerbate the banking sector's difficulties. According to several estimates, India's banking industry requires between Rs2.5 trillion and Rs6.0 trillion in capital to fulfil these standards. The issues plaguing India's banking industry impact the country's infrastructure sector as well.


For More Details About  the Impact of Securitization in Indian Banks Please Visit Our Website


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This study investigates the securitization of infrastructure assets in this setting.

  • improve PSBs' capital positions so that they are well positioned to finance new credit expansion possibilities and satisfy Basel III criteria; and
  • Increase capital flow to the infrastructure sector by securitizing infrastructure assets, thus improving access to institutional investors such as pension funds, insurance funds, and mutual funds, leveraging India's vast pool of savings.


Conclusion

This article emphasizes the potential that securitization of infrastructure assets may be a feasible alternative to assist improve the financial position of PSBs in India while also broadening institutional investors' access to infrastructure finance. Given the country's infrastructure and banking sector's problems, this choice is particularly essential. Although banks' core strengths of adequate project appraisal and monitoring skills, combined with an emerging bond market, indicate that banks will continue to provide a significant portion of the debt investment requirement, a shift to other instruments such as bonds, market securities, and foreign investment is imminent and necessary.

Because the assets are sold at par, the structure described in this article implies an upfront release of investment money. The investment excess may be further invested in high-quality assets by the originators, matching the suggested duration for bank credit and its average obligation tenure.

For More Details About  the Impact of Securitization in Indian Banks Please Visit Our Website


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