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Journalism of Courage
The cabinet decision to amend the Securities Contract Regulation Act SCRA sounds arcane. Truth is few official decisions can be more homely. Hidden in the jargon is the promise that home loans8212;and consumer loans8212;may become cheaper, with obvious, positive consequences for Middle India. The amendment will allow securitised debt to be treated as financial instruments. These can be traded at stock exchanges regulated by SEBI. When traders buy and sell these instruments, they will bring in for aspirational Indians new sources of funding for home loans and car loans. Interest rates will therefore come down.
The significance of this is measured by the gap between those future rates and the high rates charged on home loans and car loans today. The rates are high because banks, which usually do the lending, take on the credit risk of the borrower. Securitisation allows the loans to be clubbed together, to create one large asset. This is then broken up into parts and each sold as a security. When 10,000 home loans are put together in one bundle, the credit risk becomes extremely predictable. This predictability induces lower interests rates. Faced with lower risk, lenders find this instrument to be far more attractive than a single loan. Further, this pool of loans is brokenup into a million small parts, which are traded on stock exchanges. This allows transparency of pricing, and makes it possible for anyone8212;including pension funds, insurance companies and households8212;to purchase these assets, thus effectively funding home loans and car loans. Banks then restrict themselves to loan services, balance sheet functions are no longer their headache.
