RBI proposes tighter securitization rules with ₹1 crore minimum investment

Mumbai: The Reserve Bank of India (RBI) is seeking to tighten oversight of the securitization market, proposing stricter rules on who can hold these instruments and how they are traded as it looks to reinforce transparency and market discipline.

In draft amendments released on Monday, the RBI proposed mandating that securitization notes issued by commercial banks be issued, held and transferred only in dematerialized form. It also proposed extending the existing minimum investment requirement of ₹1 crore beyond the point of issuance to every subsequent transfer of these securities, ensuring they remain largely in the hands of institutional and sophisticated investors.

The central bank has invited stakeholder comments on the draft by 27 August. If adopted, the changes will take effect from 1 October.

Securitization allows banks to pool loans, such as home, vehicle and other retail loans, and transfer them to a special purpose entity (SPE), which then issues securities backed by the cash flows from those assets.

According to the RBI, the process redistributes credit risk by repackaging loans into tradeable securities with different risk profiles, allowing lenders to improve liquidity and free up capital for fresh lending while giving investors access to diversified credit exposures.

Tighter rules

The RBI said the ₹1 crore minimum investment requirement, which currently applies only when securitization notes are issued, should also apply to all subsequent transfers. To enforce this, agreements between the originating bank and the SPE must include a clause requiring the SPE to maintain the minimum ticket size on an ongoing basis.

The RBI defines ticket size as the investment made by a single investor.

The central bank also proposed revising the listing requirement. Instead of requiring securitization notes offered to 50 or more investors to be listed, the draft links the requirement to the investor threshold prescribed under the Securities and Exchange Board of India’s securitized debt regulations.

The securitization directions set out the framework governing how commercial banks bundle and sell loans to investors. They specify the types of assets that can be securitized, the amount of risk banks must continue to retain, disclosure and investor protection requirements, and capital norms. They also incorporate a framework for simple, transparent and comparable (STC) securitizations aligned with global Basel standards.

Among the key safeguards, the directions require originators to retain a minimum economic interest in securitized assets through minimum retention requirements (MRR), prescribe transparency around payment waterfalls and investor disclosures, cap retained exposures, and require appropriate governance for SPEs.

The framework also prohibits the securitization of certain asset classes, including re-securitization exposures, synthetic securitizations, revolving credit facilities such as credit card receivables, and loans with a residual maturity of less than one year, subject to specified exceptions.