SECURITIZATION STRUCTURES AND FINANCIAL STABILITY

Securitization has traditionally acted as a vehicle that distributes credit risk and facilitates balance sheet efficiency in the financial system. In India, securitization has been institutionalized by the SARFAESI Act of 2002, which is based on the transfer of financial assets to asset reconstruction companies. The asset transfer approach helps to align ownership, enforcement, and investment interests, hence promoting transparency and financial stability. Synthetic securitization, on the other hand, refers to another type of credit risk transfer in which the underlying exposures stay on the balance sheet of the originating entity but the credit risks are transferred using derivatives like credit default swaps. Though synthetic securitizations have been extensively used in several advanced financial markets to improve capital efficiency and diversify risks, there are certain issues concerning complexity, lack of transparency, and capital arbitrage involved in such transactions. The current paper evaluates the institutional and regulatory status of synthetic securitization from the perspective of financial stability in the Indian financial sector. Synthetic securitization is not part of statutory securitization since the former lacks an asset transfer element, thus making synthetic securitization a form of prudential regulation by the Reserve Bank of India that is skeptical about derivatives-based forms of credit risk transfer. Through an analysis of the differentiating features between traditional securitization and synthetic securitization, economic logic of securitization, and risks to financial stability from both traditional securitization and synthetic securitization, the current paper seeks to establish that there is a deliberate bias in the Indian legal regime against synthetic securitization in favor of traditional securitization. Key Words: Securitization, synthetic, RBI, SARFAESI Act, credit default swap.