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RBI releases draft frameworks for securitisation of standard assets and sale of loan exposures
June 11, 2020The RBI has released drafts of two guidelines, one for the Sale of Loan Exposures and the other for the Securitisation of Standard Assets.
The guidelines include the recommendations of the Committee on Development of Housing Finance Securitisation Market in India and the Task Force on the Development of Secondary Market for Corporate Loans, set up by the Reserve Bank in May, 2019. Both the Committees recommended the separation of regulatory guidelines for direct assignment transactions from the securitisation guidelines and treating it as a sale of loan exposure. Further, the securitisation guidelines needed to meet the Basel III guidelines which came into force effective January 1, 2018 and also IFRS requirements. The extant guidelines for sale of loan exposures, both standard as well as stressed exposures, are spread across various circulars. They were also required to be dovetailed with the Insolvency & Bankruptcy Code 2016 and the Prudential Framework for Resolution of Stressed Assets issued vide circular dated June 7, 2019 . Therefore the need for drafting separate comprehensive guidelines for both
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Both the guidelines apply to all Scheduled Commercial Banks (excluding Regional Rural Banks); All India Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI); and Non-Banking Financial Companies, including Housing Finance Companies. The salient provisions of each are as under:
Draft Framework for Sale of Loans:
- Sale of standard assets can 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 will be subsumed as a special case.
- Requirement of Minimum Retention Requirement (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 under its statutory or regulatory framework.
- Some of the existing conditions for sale of NPAs have been rationalised.
Draft Securitisation Guidelines:
- Only transactions that result in multiple tranches of securities being issued, reflecting different credit risks will be treated as securitisation transactions;
- 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).
- 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) with respect to Minimum Holding Period (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.
RBI has invited comments on the draft guidelines and to specific discussion questions that cover key elements of the draft frameworks.
To refer to the RBI press release dated 8 June 2020, click here, Draft Framework for Securitisation of Standard Assets here and Draft Comprehensive Framework for Sale of Loan Exposures here.
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