The first set of detailed guidelines to NBFCs on Securitization of Standard Assets was notified by RBI in February 2006.
Subsequently, to make the process more robust draft guidelines for revision of the guidelines for NBFCs were formulated and placed in public domain for comments in June 2010 and for Banks in May 2010.
RBI vide its circular DBOD.No.BP.BC-103/21.04.177/2011-12 dated May 07, 2012 issued the revised final guidelines, which were applicable to Banks.
As NBFCs too are players in the Securitization market, RBI today advised NFBCs also to adopt the same guidelines.
The thought behind these guidelines are to
01) Minimize unhealthy practices surrounding securitization, like origination of loans with the sole aim of securitization.
02) Redistribute the underlying credit risk amongst a wide range of investors.
03) Provide comfort to the investors that the originators have exercised due diligence in the Loan processing cycle.
The guidelines are organized in three Sections: –
Section A contains the provisions relating to securitization of assets. A separate circular would be issued in due course on reset of credit enhancements in case of securitization transactions.
Section B contains stipulations regarding transfer of standard assets through direct assignment of cash flows.
Section C enumerates the securitization transactions which are currently not permissible in India.
The major highlights of the guidelines are:
a) In a single securitization transaction, the underlying assets should represent the debt obligations of a homogeneous pool of obligors. This is because, a single asset securitization does not lead to redistribution of risk, and as such is not consistent with the economic objectives of securitization
b) Minimum Holding Period (MHP) – Originating NBFCs can securitize loans only after these have been held by them for a minimum period in their books.
c) Minimum Retention Requirement (MRR) – The MRR is primarily designed to ensure that the originating NBFCs have a continuing stake in the performance of securitized assets.
d) MRR will have to be maintained by the entity which securitises the loans. The entity ‘originating’, the loan and the entity ‘securitizing’, the loan can be different, in some cases.
e) Stress Testing – NBFCs should regularly perform their own stress tests appropriate to their securitization positions.
Re-disseminated by Prashant N