Post ILFS crisis, RBI’s framework creating Simple, Transparent, and Comparable (STC) securitizations has become non-negotiable. In order to get an STC label, originator needs to comply with cretain guidelines about the asset’s past performance and the consistency of underwriting. This article breaks down the framework for investors and originators.
The recent RBI announcement on the securitization regulatory framework for creating Simple, Transparent, and Comparable securitizations or STC pools is gaining momentum.
What is STC Securitisation?
One of the major changes brought by the RBI is a brand new framework for creating Simple, Transparent, and Comparable (STC) securitizations, which was non-existent before 2021 and has become non-negotiable after the ILFS crisis. The European, American, and other global markets have STC norms already in place to protect the interest of investors.
There are several guidelines that an originator needs to comply with in order to get an STC label for their deals, and some of these guidelines are about the asset’s past performance, their homogeneity, and the consistency of underwriting. As per the new STC norms, the onus of ascertaining the originator’s ability to make timely payments and fulfil all obligations lies on the investor, but the transactions come backed by certain guarantees that allow investors to feel more confident about their lending activity. For example, the pool must not contain delinquent loans, and a sample audit of the pool must be conducted before an STC securitized transaction is closed.
Why is STC a big deal?
While it is not mandatory for an originator to have only STC transactions, adhering to the regulations allows for preferential treatment from potential investors. This will give originators an edge when it comes to negotiating the deal at the best possible price.
For investors, investing in STC pools means limiting risks and maximizing returns.
Secondary trading also becomes much easier because of the secure nature of the pool.
What’s changed on CredPool?
In line with the RBI’s STC guidelines, CredPool has upgraded its systems.Originators can now mark their deals as STC transactions right when they create it
This labelling will allow the current and potential investors to know that a specific deal is an STC transaction backed by guarantees. Not to mention the ease at which investors can view STC pools created by all originators or a specific originator.
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