Reserve Bank of India has come up with draft frameworks on Securitization of Standard Assets and Sale of Loan Exposures with an attempt to simplify securitization and align it with Basel III guidelines (international banking regulations set by the Basel Committee on Bank Supervision). These drafts suggest changes to the guidelines issued by RBI in 2006 and 2012. BCBS had issued new guidelines on securitization that came into effect on January 1, 2018. Securitization guidelines are also supposed to be in line with International Financial Reporting Standards (IFRS).
Before we go into the details of the new drafts, it is important to understand the amendments made in 2012. Looking to give succor to the investors and safeguard them, RBI directed the originators to retain a portion of each securitization originated to enable effective screening of loans. A minimum period of retention of loans was decided for which period the originator was supposed to hold it, thus ensuring due diligence. Hence, guidelines were formulated for Minimum Holding Period (MHP) and Minimum Retention Requirement (MRR).
Following the release of new guidelines by BCBS in 2018, RBI in 2019 constituted a Task Force on the Development of Secondary Market for Corporate Loans and a Committee on Development of Housing Finance Securitization Market in India. Several recommendations have been made by the task force and the committee with regard to securitization market in India.
Out of the numerous recommendations, a major one has been to take the regulatory guidelines for direct assignment transactions out of the purview of securitization guidelines and consider them as loan exposure sale. In contrast to securitization wherein setting up of a Special Purpose Vehicle (SPV) is mandatory, direct assignment entails sale of loan portfolios without the use of SPV.
While examining the recommendations, RBI says it also paid heed to the public response received and decided to revisit the guidelines for sale of loan exposures, both standard and stressed. What also called for the change was the need to align the guidelines on sale of loan exposures with the Insolvency and Bankruptcy Code, 2016 (IBC) and the Prudential Framework for Resolution of Stressed Assets, said RBI. “Aimed at development of a strong and robust securitization market in India, while incentivizing simpler securitization structures, the revised guidelines attempt to align the regulatory framework with the Basel guidelines on securitization that have come into force effective January 1, 2018," RBI said.
Features of the Draft Frameworks
The new drafts postulate a host of revised guidelines as compared to the current ones. As for securitization, a transaction will be treated as a securitization transaction only if it results in multiple tranches of securities being issued reflecting different credit risks. RBI has also proposed two capital measurement approaches in compliance with Basel III guidelines. The two approaches are: Securitization External Ratings Based Approach (SEC-ERBA) and Securitization Standardized Approach (SEC-SA). Moreover, the new drafts aim to modify the definition of securitization to allow single asset securitizations. Exposures purchased from other lenders have also been allowed to be securitized. Residential Mortgage Backed Securities (RMBS) in prescriptions regarding MHP, MRR and reset of credit enhancements have been kept out of the purview of new guidelines. When it comes to the framework for sale of loans, RBI has recommended the sale of standard assets to be done by assignment, novation or a loan participation contract (either funded participation or risk participation) and the sale of stressed assets through assignment or novation. In addition, the draft proposes to include direct assignment transactions as a special case of the guidelines. It also seeks to do away with the requirement of MRR for sale of loans.
“The comments on the draft frameworks and the responses to the discussion questions may be submitted to the Reserve Bank by email latest by June 30, 2020,” said RBI.
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