RBI proposes changes to securitisation rules

Reserve Bank of India on Monday came out with draft guidelines on securitisation which includes revision in definition of securitisation and lowered the stake the originating bank or non-banking finance company has to keep in the securitised asset.

According to RBI, the definition of securitisation has been modified to allow single asset securitisations. 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 these guidelines,” the central bank said.

RBI also reduced the Minimum Retention Rate (MRR) for residential mortgage backed securities to 5% of the book value of the loans being securitised. MRR is primarily designed to ensure that originating bank or NBFC have a continuing stake in the performance of securitised assets so as to ensure that they carry out proper due diligence of loans to be securitised.

RBI also retained the minimum holding period (MHP) for residential mortgage backed securities which are issued by the special purpose entity, at six months or period covering six instalments whichever is later. The minimum holding period is the duration for which a bank or NBFC is required to hold the loans on its book before selling them.

RBI guidelines have also proposed 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 central bank has also introduced a special case of securitisation, called Simple, Transparent and Comparable (STC) securitisations with clearly defined criteria and preferential capital treatment.

These guidelines are applicable to all banks, financial institutions like NABARD, NHB, EXIM Bank, and SIDBI and,all non-banking financial companies including housing finance companies.

The draft guidelines take into account the recommendations of the Committee on Development of Housing Finance Securitisation Market in India (Chair: Dr. Harsh Vardhan) and the Task Force on the Development of Secondary Market for Corporate Loans (Chair: Shri T.N. Manoharan), which were set up by the Reserve Bank in May, 2019.

“Aimed at development of a strong and robust securitisation market in India, while incentivising simpler securitisation structures, the revised guidelines attempt to align the regulatory framework with the Basel guidelines on securitisation that have come into force effective January 1, 2018,” RBI said.