Securitisation of standard assets is an important tool used by banks and financial institutions to increase liquidity in financial markets and to ensure access to loans and financial products for unbanked sections of society. The Reserve Bank of India (RBI) has regulated securitisation by banks and financial institutions through guidelines first issued in 2006 and supplemented in 2012. Each iteration of the RBI’s guidelines has been as welcome as an unnecessary speed bump on a highway.
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In 2020, purportedly with the aim of aligning the securitisation framework with the guidelines issued by the Basel Committee on Banking Supervision and the requirements of the International Financial Reporting Standards, the RBI released a draft framework for the securitisation of standard assets, inviting feedback from stakeholders. On 24 September 2021, the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021, were issued. The 2021 directions apply to securitisation undertaken by banks and financial institutions and came into effect immediately.
Other than certain identified categories of assets, all on-balance sheet exposure to loans classified as standard can be securitised. Unlike the previous framework, the 2021 directions no longer prohibit the securitisation of a single asset or loans purchased from other financial institutions. However, the securitisation of loans provided to other financial institutions is no longer permitted. Replenishment securitisation also seems to have been accepted by the 2021 directions.
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The 2021 directions revisit minimum holding period (MHP) requirements for different asset classes. While the MHP was previously determined on the basis of the number of repayments made, MHP is now required to be determined on the basis of the time for which a loan has been held after being made. Minimum retention requirements (MRR) continue to be determined on the basis of the original maturity of the underlying loan. While the total exposure of an originator under a particular securitisation transaction cannot exceed 20% , the method of calculation prescribed under the 2021 directions differs slightly from the previous framework. The 2021 directions also aim to clarify the capital treatment of securitisation transactions in a manner more friendly than the previous framework. The 2021 directions have introduced the concept of simple, transparent and comparable (STC) securitisation, which qualifies for lower capital requirements.
A special purpose entity (SPE) must be established for the purposes of securitisation, the requirements of which are largely in line with the previous framework, and which generally aim to ensure separation between the originator and the SPE. In lockstep with the previous framework, securitisation must be without recourse to the originators. Originators cannot support losses but can provide credit enhancement facilities, liquidity facilities, underwriting facilities and servicing facilities. In case of breach of any representation or warranty by an originator, securitised assets can be replaced within 120 days of securitisation.
The 2021 directions require financial institutions investing in securitisation transactions to comply with certain requirements, including those in respect of due diligence, analysis, credit monitoring and valuation. Further, it is mandatory to list securitisation notes or pass-through certificates (PTCs) offered to more than 50 investors.
While some of the changes introduced by the 2021 directions are positive and have opened new avenues for originators to explore, some other features are regressive and lack foresight. For instance, curtailing the securitisation of loans to other lending institutions has handicapped an emerging sub-sector. The timing of the 2021 directions and their immediate effect has also caused unhappiness, and has led some investors and originators to question the continued viability of this route. While the RBI has generally been considered as a regulator attuned to its stakeholders’ needs, some of the changes introduced by the 2021 directions show that its lines of communication need to be strengthened.
Sawant Singh and Aditya Bhargava are partners at the Mumbai office of Phoenix Legal. Sristi Yadav, a senior associate, also assisted with the article
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