11th April 2025 (12 Topics)

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Market-based Securitisation of Stressed Assets

Context

The RBI has proposed to allow securitisation of stressed assets through a market-based mechanism, not just through Asset Reconstruction Companies (ARCs) as is currently done.

Asset Reconstruction Companies (ARCs)

In India, the SARFAESI Act, 2002 enabled setting up Asset Reconstruction Companies (ARCs), which buy stressed assets from banks and try to recover them.
Limitations of ARC-driven model:
- Limited number of players
- Low recovery rates in many cases
- Market concentration (few large ARCs dominate)
The RBI now plans to open securitisation of stressed assets to a broader market-based mechanism, rather than restricting it to ARCs.
This change is expected to:
- Increase participation from mutual funds, private investors, and financial institutions,
- Create a secondary market for distressed debt, improving pricing and efficiency,
It aligns with global best practices (like US and UK models).

What Are Stressed Assets?

Stressed assets are loans where repayment is delayed or doubtful. They include:
- Non-Performing Assets (NPAs): Loans overdue >90 days.
- Restructured Loans: Modified repayment terms due to borrower difficulty.
- Written-off Assets: Deemed irrecoverable by the bank.
These assets affect banks' balance sheets and limit their capacity to lend.
Securitisation: It is a financial process in which banks convert their loan assets (including stressed assets) into marketable securities, which are then sold to investors.
- Banks pool loans (e.g., housing loans, or stressed corporate loans),
- Package them into financial instruments,
- Sell them to investors to transfer the risk and unlock capital.

Benefits of Securitisation	Risks
Frees up capital for banks. Distributes credit risk across the market. Helps clean up balance sheets without waiting for slow recovery processes.	Can create complex and opaque instruments (as seen in 2008 crisis). Poor risk assessment can affect investor confidence.

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Market-based Securitisation of Stressed Assets

Asset Reconstruction Companies (ARCs)

What Are Stressed Assets?

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