Need for securitization in India

Abstract

The main purpose of the CCS is to prove that the development of securitisation market in India is inevitable. The following is the main argument which we have supported by data analysis: The Government of India would always maintain a minimum 51% stake in the public sector banks as mandated by the legislature. Currently, it holds on an average 61% stake in all the public sector banks. According to the BASEL accord, if the public sector banks were to increase the amount of advances, their total capital would need to increase and hence, the government would need to infuse additional capital. In the CCS, we try to prove that to sustain the current growth of GDP, the incremental advances and hence the capital infusion required by the government would be almost impractical. We have used a period of 5 years as a basis of our forecasting and analysis. The first step in proving the argument is to forecast the incremental advances and hence, the capital that the government would need to infuse in the public sector banks over the next five years. Then we compare this with the capital infusions done by the government in the recent years to conclude that infusing the required capital over the next five years would be almost impossible for the government. Having proven that the current systems in place are not sufficient to sustain the growth, we next look at the alternatives which can be used to maintain the growth in advances and hence the growth. We look at three major alternatives – Development of private sector banks, External commercial borrowings and Securitization. We discard the first option because private sector banks represent only a minority in the banking system in India and their development to the required scale would take a long time. The other argument against it is the higher cost of funds for the private sector banks which would make the dependence on them economically inefficient. ECB’s are a very small portion of the total domestic advances and hence are not likely to have a significant impact. We close our argument by stating that securitisation market in India has to be developed in the near future to sustain the growth. A securitisation market would also help to increase the liquidity and reduce the costs of funds. Thus, securitisation market is inevitable for India to sustain its current economic growth.