Delinking ratings from credit profile may hit securitisation, says CRISIL

Delinking ratings on securitised instruments from the credit profiles of originators is likely to affect liquidity to companies, agency CRISIL has said.

There has been a spate of downgrades and defaults on securitised instruments backed by receivables originated by Dewan Housing Finance Corporation Ltd (DHFL) in the past three months.

The rating actions were triggered primarily by legal challenges that call into question the basic tenets of securitisation. These developments will need to be monitored closely and have the potential to impact the growth of India’s developing securitisation market

The legal and regulatory developments raise questions on the very basis of delinking the ratings on securitised instruments from the credit profiles of their originators.

The ability of credit rating agencies and investors to differentiate the credit quality of securitised instruments from their servicers and originators could be affected, said CRISIL in a statement.

Non-banks, excluding government-owned finance companies, accounted for 18% of the credit outstanding in the economy as of March 2019. The quantum of funds raised by non-banks through securitsation in the past two years ended September 2019 was Rs 3.4 trillion. Such an unexpected legal obstacle can create systemic risk for the economy.

Widespread defaults driven by the apparent futility of structural features inbuilt in securitisation transactions could dent investor confidence. This is especially in case of savvy investor communities such as mutual funds, family wealth offices, private banks and foreign banks.

The government has announced partial credit guarantee scheme under which securitisation of Rs one trillion of assets is to be facilitated. The working of scheme might be impacted if banks develop cold feet on lack of clarity of the bankruptcy remoteness of securitised assets.

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