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Is Securitization Bad?

The securitization of loans in India is covered by a number of rigorous guidelines. The fact that the sub-prime bust originated in securitized loans should not induce further restrictions on this. It is a useful innovation and the RBI rules should take care not to scare it away totally. Securitization is a good tool to be carefully used. Let not the RBI make the rules too strict. It is more important to ensure that the originator of the loan practices the appropriate procedures of lending — adequate security and monitoring of repayments in time.

Microfinance requires new and innovative products to ensure greater reach this would further encourage more sophisticated financial instruments to participate in the microfinance market. Taking the stock of current and future developments regulation of microfinance becomes important. Rating of MFIs, structured securities, regulating secondary market for structured securities would be good precautionary steps.

The idea of regulation in microfinance financing could be appear too farfetched in the present context but there would no opportune moment to emphasize that “precaution is always better than cure”.

References

Basu S. (2005), Securitization and Challenges Faced in Microfinance, Centre for Microfinance Research, 2005

Wypolsz C. (2007), Subprime ‘Crisis’: Observations on the emerging debate

Venkitaraman S. (2007), Learnings from Financial Crisis, Business Line

Concluded.

* Contributed by: -
Raghavendra Badaskar,
PGP II,
T. A. Pai Management Institute, Manipal.