The Reserve Bank of India has updated the guidelines for Securitization of Assets which may have a lasting impact on the debt market. Securitization is a simple process where one firm sells an underlying pool of assets (for example, loan books) to investors, mostly large banks, as a financial instrument. Inline, YubiPools has updated its systems to become compliant so that you no longer have to worry about compliance and continue to transact seamlessly across our platforms.
CredPool from Yubi is a unified portal that facilitates loan originators to meet their right investors in a safe, secure, and immersive marketplace that promises a smooth experience and, of course, a reduced sales cycle.
The following is an update on what’s changed for you and the overall effect on your deals.
Minimum Retention Requirement (MRR)
MRR ensures that the originators have a continuing stake in the securitized assets’ performance to carry out due diligence of loans to be securitized.
Old guidelines: As per the old guidelines, for loans with an original maturity period of 24 months or less, the MRR charges were 5% of the book value of the assets being securitized. For loans with an original maturity period of over 24 months, the MRR charges were 10% of the book value of the assets being securitized.
New guidelines: Under the updated guidelines, the underlying loans with an original maturity of 24 months or less will have an MRR charge of 5%. Meanwhile, underlying loans with an original maturity of more than 24 months will have an MRR of 10%. For residential mortgage-backed assets, the MRR charge will be 5% irrespective of the original maturity period. Additionally, over-collateralization will no longer qualify as a replacement for MRR charges. An MRR of 10% is also charged if 1/3rd of loan-level due diligence is conducted. If 100% of the loan-level due diligence is conducted, there is no longer any need for MRR. Lastly, the RBI now mandates that the MRR must not exceed 20%
Impact: Originators will have to comply with the new norms by having higher cash reserves. If complete due diligence is conducted, 100% of assets can be treated as an off-balance sheet.
In addition to this, CredPool’s feature updates will ensure that you get an alert if your MRR exceeds 20% to avoid penalties. At Yubi, the MRR calculated consists of cash collateral, over collateral, bank & corporate guarantees, and SLCE.
Reset of Credit Enhancement (CE)
CE is a process of enhancing a financial transaction’s credit profile via additional financial support to help cover the losses on securitized assets in adverse conditions.
Old guidelines: The first credit reset was permitted upon the amortization of 50% of the total principal amount assigned, while the reserve floor to be maintained was 30% of the initial credit enhancement.
New guidelines: The first credit reset is now allowed upon the amortization of 25% of the total principal amount assigned for residential mortgage-backed assets. Meanwhile, the reserve floor to be maintained has been reduced for residential mortgage-backed assets to 20% and 30% for other securities. The credit reset frequency has also been upgraded to 6 months.
Impact: With clear guidelines differentiating the minimum holding period for residential mortgage-backed assets and other securities, the negative connotation of cash collateral is expected to come down.
At CredPool, investors will be asked for their consent to agree to credit reset before proceeding with it automatically. Upon the investor’s discretion, this consent can be taken each time a reset has to happen or take implicit consent for the rest of credit enhancement.
In addition to this, Yubi has included norms under which the credit reset will happen. Accordingly, the first reset will not be allowed if the rating has gone below the original rating. Only the rating agency, which had rated the securitization transaction initially, shall re-rate it to reset credit enhancement.
Minimum Holding Period (MHP)
MHP is the duration for which the originators or investors must hold an underlying financial asset before selling it.
Old guidelines: The MHP for all asset classes was the same.
New guidelines: The MHP for loans with tenure up to 2 years is now three months and the same for loans with more than two years is now six months. For better understanding, the MHP will now be counted from the date of registration of security. For retransfer of the purchased securities, MHP will be six months after the purchase of the assets.
Impact: Since getting the date of registration of security interest was a big challenge, the first repayment of the loan will be considered for the MHP for unsecured or loans where security interest cannot be registered.