Crisil, the rating agency, has estimated that securitisation as a financial management tool has the potential to offer capital relief to the extent of about Rs 5,500 crore (Rs 55 billion) to the Indian banking system.

While on an overall basis this constitutes 6.5 per cent of the net worth of the entire system, in Crisil's opinion new private sector banks and foreign banks are expected to derive substantially higher capital relief from securitisation.

Crisil is of the view that when these are viewed in the backdrop of the Rs 60,000 crore (Rs 600 billion) securitisation potential in the Indian banking system and the relatively lower capitalisation levels in the system, securitisation presents itself as a very efficient and potent instrument to preserve capital adequacy levels for banks.

The potential for securitisation is the highest for foreign banks and new private sector banks at 10-12 per cent of their asset base as compared to an overall securitisation potential of 4 per cent for the banking system.

This is essentially based on the relative asset composition of various categories of banks, the relative potential for securitisation of these asset classes, the track record demonstrated by these banks in the past in originating securitisation transactions and the internal monitoring systems developed by the banks for tracking such transactions.

The capital relief potential is as high as 17 per cent for new private sector banks and 9.8 per cent for foreign banks essentially on account of their relatively higher securitisation potential.

New private sector banks are expected to obtain a higher level of capital relief than foreign banks because of their lower existing levels of net worth to total assets vis-a-vis the latter.

Crisil believes that though new private sector banks and foreign banks would initially take the lead in increasingly using securitisation as an alternative financial management technique, other banks that have been conspicuous by their absence from the segment till date would also begin to look at securitisation more favourably in terms of managing their capital structure.

This trend would essentially be driven by the increasing awareness about securitisation in Indian financial markets, the thrust provided by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and the other multifarious benefits provided by securitisation itself such as exposure management, profit and loss account and balance sheet management and asset liability management. Securitisation refers to the conversion of cash flows into marketable securities.

It is a process through which illiquid assets are packaged, converted into tradable securities and sold to third-party investors. Such securities are referred to as asset-backed securities.