RBI proposes revision in securitization definition for Sale of Loan Exposures including Standard Assets

Reserve bank of India proposes revision in definition of securitisation and lowered the stake the originating bank or non-banking finance company has to keep in the securitised asset.  The Banking Regulator  has placed on its website two draft documents for public comments – the ‘Draft Framework for Securitisation of Standard Assets’ and ‘the Draft Comprehensive Framework for Sale of Loan Exposures’. The proposed guidelines are applicable to all Scheduled Commercial Banks (excluding Regional Rural Banks) and financial institutions like NABARD, NHB, EXIM Bank, and SIDBI; and, NBFCs including Housing Finance Companies.

Salient features of the draft securitisation guidelines:

 The definition of securitization is planned to be modified to allow single asset securitizations.  Under the revised drafted guidelines securitisation of exposures purchased from other lenders has been allowed.  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 the draft guidelines. One of the key changes relates to differential treatment for Residential Mortgage-Backed Securities (RMBS) compared to other securitisations in respect of prescriptions regarding minimum holding period (MHP), minimum retention requirements (MRR) and reset of credit enhancements. Guidelines propose two capital measurement approaches such as Securitisation External Ratings Based Approach (SEC-ERBA) and Securitisation Standardised Approach (SEC-SA) in line with Basel III guidelines. The guideline envisages the introduction of a special case of securitisation, called Simple, Transparent and Comparable (STC) securitisations with clearly defined criteria and preferential capital treatment.

The draft framework for sale of loans proposes some changes as compared to the existing guidelines. Accordingly, sale of standard assets may be by assignment, novation or a loan participation contract (either funded participation or risk participation) but the sale of stressed assets may be by assignment or novation. The regulatory guidelines for direct assignment transactions are proposed to be separated from the securitisation guidelines and subsumed under a separate set of Comprehensive Guidelines on Sale of Loan Exposures. Under the mentioned guidelines the requirement of MRR (minimum retention rate) 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.Further, certain existing conditions for sale of NPAs have been rationalised.

As per RBI communiqué “These comprehensive guidelines harmonise the extant guidelines on sale of loan exposures issued through various circulars, and make them consistent with the changed resolution paradigm in the form of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Prudential Framework for Resolution of Stressed Assets issued vide circular dated June 7, 2019”. It also said that the revised guidelines attempt to align the regulatory framework with the Basel guidelines on securitization.