New guidelines on ‘Sale of Loan Exposures’ and ‘Securitisation of Standard Assets

The Reserve Bank of India (RBI) released the draft framework for ‘sale of loan exposures and securitisation of standard assets’ for the purpose of securitisation of the Indian market. 

• Aimed at development of a strong and robust securitisation market in India, while incentivising simpler securitisation structures, the revised guidelines attempt to align the regulatory framework with the Basel guidelines on securitisation. 
• Applicability: These guidelines are to be followed by-
• Scheduled Commercial Banks (excluding Regional Rural Banks)
• All India Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI) 
• All Non-Banking Financial Companies (NBFCs) including Housing Finance Companies (HFCs).

Key-features of the Guidelines:

• Framework for Sale of Loan Exposures:

• Sale of standard assets may be by assignment, novation or a loan participation contract (either funded participation or risk participation) whereas the sale of stressed assets may be by assignment or novation.
• Direct assignment transactions shall be subsumed as a special case of these guidelines.
• Requirement of MRR for sale of loans has been done away with.
• The price discovery process has been deregulated to be as per the lenders’ policy.
• Stressed assets may be sold to any entity that is permitted to take on loan exposures by its statutory or regulatory framework.
• Some of the existing conditions for sale of NPAs have been rationalised.
• Framework for Securitisation of Standard Assets
  • Only transactions that result in multiple tranches of securities being issued reflecting different credit risks will be treated as securitisation transactions, and accordingly covered under these guidelines;
  • In line with the Basel III guidelines, two capital measurement approaches have been proposed: Securitisation External Ratings Based Approach (SEC-ERBA) and Securitisation Standardised Approach (SEC-SA).
  • Further, a special case of securitisation, called Simple, Transparent and Comparable (STC) securitisations, has been prescribed with clearly defined criteria and preferential capital treatment.
  • The definition of securitisation has been modified to allow single asset securitisations. Securitisation of exposures purchased from other lenders has been allowed.
  • Carve outs have been provided for Residential Mortgage Backed Securities (RMBS) in prescriptions regarding MHP, MRR and reset of credit enhancements.
  • A quantitative test for significant transfer of credit risk has been prescribed for derecognition for the purpose of capital requirements, independent of the accounting derecognition

What is securitisation?

• Securitisation refers to the conversion of loans such as auto, house, credit cards etc. of banks and lenders into debt instruments.
• It is a process by which a company clubs its different financial assets/debts to form a consolidated financial instrument which is issued to investors. In return, the investors in such securities get interest.
• This process enhances liquidity in the market. This serves as a useful tool, especially for financial companies, as its helps them raise funds.