role as the dominant suppliers of credit in some countries, and securitisation has become a core component of the market - based supply of credit. while corporate bonds served as the main dis - intermediated financing tool for non - financial corporations, securitisation acted as the main capital market instrument for household finance, and to a lesser degree smes. post crisis, however, many of the pitfalls of the securitisation market have come to the fore. securitisation per se has not been discredited totally though the new normal for securitisation markets is expected to be lower than its pre - crisis peak. 26. covered bonds are considered an important part of this new normal particularly in europe where it is permitted subject to safeguards. in this case the bonds are issued secured by high quality assets and both the liability and the assets remain on the balance sheet of the bank. the concentration of risks in the banking system remains which puts great strain on the health of the bank balance sheets. more importantly, it raises issues for the resolution regime given that the backing for depositors gets constrained. 27. the downside of securitisation that has come to the fore is the absence of alternative solutions available to borrowers to restructure their loans when there is a downturn with the originator since the banker – customer relationship is snapped when the loans are securitised. any restructuring requires consent of the final investors and in the long chain of intermediaries it becomes difficult to restructure debt. 28. one of the reasons for the complexities of structures is that other derivatives such as currency and interest rate swaps are also embedded in some structures. this can be dealt with if these transactions are undertaken by the spv and not embedded in the original structure. 29. in the indian context, “ sustainable securitisation ” can indeed play a positive role in financial intermediation provided there is genuine transfer of risk away from the banking system. the existing and proposed guidelines are in line with international practices and may appear stringent but in the long term, it is imperative that securitisation market develops for the right reasons. it is also necessary to promote standardisation to facilitate risk assessment and valuation and eventually enable the trading of these securities on the exchanges. there are a few challenges which need to be addressed. bilateral assignments of a single loan or a portfolio that are in substance securitisation should be subject to the guidelines on

a funding source – was limited. nevertheless, securitisation of retail loans, both abs and rmbs reported a 61 per cent increase in volume in 2009 – 10. 16. while the securitisation market has remained concentrated with a handful of originators and limited investors, the asset classes have continued to diversify, the latest additions being gold loans, microfinance loan receivables and loan against property. trends in structured finance volumes ( rs. billion ) type 2001 – 02 2002 – 03 2003 – 04 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 – 09 2009 – 10 abs 12. 9 36. 4 80. 9 222. 9 178. 5 234. 2 313. 2 135. 8 209. 7 mbs 0. 8 14. 8 29. 6 33. 4 50. 1 16. 1 5. 9 32. 9 62. 5 cdo / lso / slsd 19. 1 24. 3 28. 3 25. 8 21. 0 119. 0 318. 2 364. 4 145. 8 others 2. 3 0. 5 – – 11. 6 7. 9 total 36. 8 77. 8 139. 3 308. 1 249. 6 369. 3 650. 3 544. 7 425. 9 ( cdo : corporate debt obligations, lso : loan sell off, slso : single loan sell - down ) source : various rating agencies like icra, crisil etc. rbi guidelines 17. rbi had issued comprehensive guidelines on securitization in february 2006 based on international best practices. the main focus of the guidelines was to encourage securitization in manner that ensures true sale - real risk transfer and banks do not retain risks in the transferred assets beyond a point. to this end, limit was placed on banks ’ exposure to ptcs and concentration of entire credit enhancement in the originating bank was discouraged by making second loss facilities more costly through higher capital adequacy. banks are however permitted to invest outside the prescribed limit for non - listed investments in abs and mbs which are rated at or above the minimum investment grade. 18. another feature of the 2006 guidelines was the requirement that the gain on securitization of assets should not be recognized upfront and should be amortised over the life of the securities issued. this requirement was put as a conservative measure to avoid securitisation being used to inflate profits even while banks exposures in