On September 24, 2021, RBI has issued the final guidelines (“Master Direction”) for securitisation transactions pursuant to the Basel guidelines on securitisation and the recommendations of (i) the Committee on Development of Housing Finance Securitisation Market in India; and (ii) the Task Force on the Development of Secondary Market for Corporate Loans. The RBI has revamped the regulatory regime applicable to securitisation with the objective of eliminating complicated, opaque structures and move towards prudentially structured transactions.
Applicability: On and from September 24, 2021 to all banks, all financial institutions, all non-banking financial companies including housing finance companies.
Key highlights: The Master Direction has introduced some new concepts along with some key structural changes. Few 0f such changes are provided herein below:
- Assets not eligible for securitisation
Restructured loans and advances which are in the specified period, exposures to other lending institutions and refinance exposures of All India Financial Institutions are not eligible for securitisation.
- Securitisation of Acquired Loans
The specific prohibition on the securitisation of loans that have been acquired (as opposed to being originated) has been removed and securitisation of loans that have been acquired by the transferor is now permitted subject to a minimum holding period of 6 months in the books of the originator.
- Single loan securitization
Single loan securitisation is permitted under the Master Direction, which was not permitted under the previous regulatory regime.
- Homogenous Pool
The requirement that securitisation transactions must have a homogenous pool of underlying assets has been removed; however, for being classified as a simple, transparent and comparable securitisation, (please see below), this requirement will still have to be met.
- MRR and MHP
- The minimum retention requirement (“MRR”) for residential mortgage loans, has been fixed at 5%, irrespective of the tenure of the loans.
- The other requirements in relation to MRR appear to be similar to the old guidelines except that it has been simplified to state that MRR (upto 5%) will be maintained through first loss facility, if first loss is not available, through equity tranche and any balance through investment in other tranches sold to investors. The balance portion of the MRR can be maintained in any combination of the above.
- For secured loans, MHP is counted from the date of creation (and registration) of security interest. MHP is now either 3 months or 6 months (and is not linked to receipt of payments) as opposed to the prior requirements of 12 months.
- Where security is not there, MHP is calculated from the date of first repayment.
- Second loss credit facility
It has been clarified that second loss credit facility can also be used even if first loss is repudiated, or the first loss provider is under insolvency or bankruptcy or liquidation.
- Minimum ticket size
The minimum ticket size for issuance of securitisation notes shall be Rs. 1 crore.
- Liquidity Facility
The requirement that in the event liquidity facility is provided by the originator, it has to be replaced by a third-party liquidity provider to the extent of 25% has been done away with.
- RBI intimation
The RBI reporting requirement is clearly spelt out to cover situations where damages are paid on account of breach of representations and warranties and is not limited to replacement of contracts.
A new definition for the term ‘Securitisation’ has been introduced. The definition states that cash flow from the pool of assets should be used to service securitisation exposures of at least two different tranches reflecting different degrees of credit risk.
- STC Securitisations
The Master Direction has introduced an important aspect of simple, transparent and comparable (STC) transaction. Exposures to securitisations that are STC compliant can be subject to the alternative capital treatment (with a differential risk weightage treatment). The key conditions for qualifying as an STC transaction are provided below:
- The underlying assets should have interest rates linked to benchmark rates.
- The underlying assets have to be homogenous and the new securitisation guidelines sets out principles to be followed with respect to determining homogeneity.
- There cannot be any delinquencies at the time of securitisation.
- The originator should have a historical track record in this business for between 5 (five)- 7 (seven) years.
- The underlying borrowers should not have adverse credit history. This data check should be done on a date not earlier than 45 (forty five) days prior to the securitisation.
- There is requirement of verification of underlying assets by a third party, on sample basis, to confirm compliance with STC conditions. All material observations from this report needs to be disclosed in the placement memorandum.
- There are risk weight standards set out, which the underlying loans have to meet.
- A single underlying exposure cannot exceed 1% (or 2% in certain circumstances) of total portfolio exposure.
Bottom line: The introduction of Master Direction in consonance with Basel III Regulations is certainly a great initiative by RBI to synchronize the Indian securitisation market with the global benchmark. The Master Direction has introduced an important aspect named simple, transparent comparable transaction. This is a concept imported from the Basel III capital regulations, which has been introduced to ensure that a particular class of securitisation transactions are afforded with simple accounting and capital treatment and to lay down the benchmarks for the same. These coordinated efforts through the Master Direction will go a long way in reshaping India’s securitisation market.
For a detailed reading on the master direction, please see click here.