Boosting securitisation

The RBI’s recent draft frameworks on securitisation of standard assets and sale of loan exposures seek to bring in much-needed transparency in securitisation transactions, improve balance sheet risk management and liquidity for banks and NBFCs, and facilitate better price discovery of stressed assets. With the surge in securitisation transactions post the NBFC crisis, and the emergence of a new pool of assets (aside from mortgages) being securitised — auto, microfinance, lease rentals, etc — RBI’s framework on securitisation will help put in place a more robust mechanism to regulate the market.

The existing guidelines on Securitisation of Standard Assets were laid down in 2006. With regulators across the world tightening the rules around securitisation post the 2008 financial crisis, the RBI had also made revisions to the guidelines in 2012 by introducing minimum retention requirement (MRR) — mandating originators to have a continuing stake in the performance of securitised assets and a minimum holding period (MHP) for assets to be on the books of the originator before it can be securitised. The recently proposed framework is a big step towards bringing the guidelines in sync with global practices. For instance, the move towards introducing the concept of ‘Simple, Transparent and Comparable’ securitisations is a key positive as it offers a more straightforward comparison across securitisation products within an asset class and aids investors in evaluating underlying risk better. To encourage more residential mortgage-backed securities, the RBI has also proposed to lower the MRR and MHP requirement and sought mandatory listing of securities if exposures underlying a residential mortgage-backed securitisation is ₹500 crore or above (to create a secondary market for investors and possibly allow mutual fund participation). Introducing rating based risk weights for NBFCs and banks in line with Basel III practices will offer some capital relief. The framework for sale of loan exposures, covering both standard and stressed assets, is also a welcome move for the banking sector. Not only does it ensure liquidity and better risk and asset-liability management for lenders, but it could also ease risk aversion among banks to some extent (by offering an exit after a period of time). In case of standard assets — not an NPA or SMA account — a lender can transfer even a single asset, with no prescribed MRR but only on cash basis. To avoid misuse, the RBI will however have to introduce caveats.

For the distressed assets space in India that has been dogged by inefficient price discovery and tepid investor interest, the RBI’s framework on stressed assets can help. With banks’ bad loans set to rise and given the suspension of IBC proceedings (on Covid defaults), the guidelines can ease banks’ burden as the transferee need not be a financial entity. Proper checks are needed to ensure that banks do not use this to evergreen their balance sheets.