Giant leap for debt market

Updated: Nov 14 2005, 05:30am hrs
Thursdays Cabinet decision to allow trading in securitised debt by amending the Securities Contract (Regulation) Act is perhaps the single most significant step taken by the government to boost the debt market in a long, long time. Though the market in securitised debt has grown considerably in the past few years, the absence of a legal framework for trading in such paper had meant that the market remained stunted. The amendment to the SCRA should change all. Why Because these instruments will qualify for listing on SEs and can be traded as easily as shares.

Securitisation is a process whereby a number of loans are aggregated or bundled by a lender, only to be disaggregated or unbundled into smaller debts. These smaller debts are then sold to investors in the form of notes or certificates, representing a claim on the underlying debt. Securitisation greatly reduces riskthanks to the law of large numbersand, hence, makes it possible to price loans cheaper. It also frees resources, since lenders do not have to wait till the loan is repaid. Instead, they can raise money against the securitised receipts and lend some more.

Consequently, any move facilitating securitisation has huge positive spinoffs for the economy. It enables easier access to funds for sorely-needed, long-gestation infrastructure projects. And for individuals, it provides an additional avenue for savers to invest, even as it makes products like housing and other consumer loans cheaper, as banks and finance companies will be able to recycle their funds. It widens and deepens the debt market and, thereby, leads to better pricing of risks (since the expectations of all market participants are incorporated into bond prices).

Indeed, developed capital markets the world over are characterised by a dominance of debt, rather than equity instruments. In India, however, the debt market has remained relatively under-developed, compared to the equity market. Government securities account for an overwhelming share of the debt market, while the corporate bond market is almost non-existent. Even in the government securities market, there are few players, with the market essentially restricted to banks, primary dealers, insurance companies and a few mutual funds. If we are to find resources to fund our huge infrastructure requirements, this must change. We must have both, more players and more instruments. Securitisation enables both. It is now for the government to ensure that last weeks Cabinet decision is quickly followed through.