Will the Minister of FINANCE be pleased to state:-

(a)        whether relaxed loan securitization practice in the United States of America was the key factor behind the sub-prime crisis that eventually led to global financial meltdown;

(b)        if so, whether by hindsight, India has planned to prescribe a minimum lock-in period and minimum retention criteria for securitizing loans originated and purchased by banks;

(c)        if so, whether Government would like to review this policy in this regard; and

(d)        if so, by when?

ANSWER

THE MINISTER OF STATE IN THE MINISTRY OF FINANCE
(SHRI NAMO NARAIN MEENA)

(a)        As per the assessments, a combination of factors was responsible for sub-prime crisis in USA, which inter-alia, include sustained rise in asset prices, particularly house prices, during early 2000s on the back of excessively accommodative monetary policy, tax lending standards, financial innovations, etc.  Though, securitization improves the overall efficiency of financial intermediation by way of transfer of risk from the originator and allows greater risk dispersal, the events surrounding the crisis revealed that the benefits can be undermined by weaknesses stemming from the interactions between individual incentives and the quality of the Information flow along the securitization chain.

(b) to (d) :         The securitization framework in India is considered to be reasonably prudent and has been able to minimize the incentives which led to the problems surfaced in the current crisis.  In order to further strengthen the framework, the Reserve bank of India (RBI) has, in its Annual Policy Statement for the year 2009-10, announced to prescribe a minimum lock-in-period and minimum retention criteria for securitizing the loans originated and purchased by banks.

(b)        No, Sir.

(c)        No, Sir.

(d)        No, Sir.

(e)        Does not arise.