Is history poised to repeat itself?
SBI's plan to securitise a portion of its home loan portfolio suggests exactly that, evoking memories of the 2008 global financial crisis.
State Bank of India (SBI) is the largest bank in India. Its practices and actions in the market go on to impact the entire Indian banking sector.
State Bank is planning to securitise a portion of its ₹10 trillion home loan portfolio. It must be noted that deposits are slowing in India, and Indian banks are struggling to mobilise enough deposits to match the demand for loans due to low interest rates. SBI is not an exception to it. So SBI, with the purpose of diversifying its funding sources, is considering raising funds by securitising its home loan portfolio by issuing mortgage-backed securities to institutional investors. This plan aims to boost liquidity and expand its lending capacity.
This move of SBI revives the memories of the 2008 global financial crisis originating in the USA. American banks aggressively securitised subprime mortgage contracts and sold them to investors worldwide. This became one of the most profitable businesses, which led to excessive risk-taking, weak underwriting standards and complex financial products. Once the supply overpowered the demand, it resulted in widespread defaults across the US, which eventually led to the collapse of major financial institutions such as Lehman Brothers, Washington Mutual and AIG. Then a severe global recession followed.
SBI's plan to securitise a portion of its home loan portfolio suggests exactly that, evoking memories of the 2008 global financial crisis.
State Bank of India (SBI) is the largest bank in India. Its practices and actions in the market go on to impact the entire Indian banking sector.
State Bank is planning to securitise a portion of its ₹10 trillion home loan portfolio. It must be noted that deposits are slowing in India, and Indian banks are struggling to mobilise enough deposits to match the demand for loans due to low interest rates. SBI is not an exception to it. So SBI, with the purpose of diversifying its funding sources, is considering raising funds by securitising its home loan portfolio by issuing mortgage-backed securities to institutional investors. This plan aims to boost liquidity and expand its lending capacity.
This move of SBI revives the memories of the 2008 global financial crisis originating in the USA. American banks aggressively securitised subprime mortgage contracts and sold them to investors worldwide. This became one of the most profitable businesses, which led to excessive risk-taking, weak underwriting standards and complex financial products. Once the supply overpowered the demand, it resulted in widespread defaults across the US, which eventually led to the collapse of major financial institutions such as Lehman Brothers, Washington Mutual and AIG. Then a severe global recession followed.
However, SBI’s proposal is significantly different from the practice which led to the 2008 global financial crisis. Also, the Indian banking sector has been prudent and strict in lending practices, with house loans having very low default rates. Apart from this, the RBI maintains very strong oversight in comparison to its American peer. So there wouldn’t be excessive accumulation of risks in the Indian banking sector.
Nevertheless, the experience of the 2008 global financial crisis is a reminder for India. Without doubt, securitisation of home loan portfolios can be an effective tool for improving liquidity if it is accompanied by transparency, prudent risk assessment and robust regulatory supervision, but not risk-free. Any lapse in regulatory oversight to ensure financial stability may result in the same fate for India as the Global Financial Crisis of 2008.
Should RBI allow the State Bank's plan to securitize its home loan portfolio and issue mortgage-backed securities?
Nevertheless, the experience of the 2008 global financial crisis is a reminder for India. Without doubt, securitisation of home loan portfolios can be an effective tool for improving liquidity if it is accompanied by transparency, prudent risk assessment and robust regulatory supervision, but not risk-free. Any lapse in regulatory oversight to ensure financial stability may result in the same fate for India as the Global Financial Crisis of 2008.
Should RBI allow the State Bank's plan to securitize its home loan portfolio and issue mortgage-backed securities?
Rajeev Upadhyay
No comments:
Post a Comment