RBI Finalises New Securitisation Guidelines

The Reserve Bank of India on Friday announced revised guidelines for securitisation of standard assets.

The final rules, however, differ considerably from the draft guidelines issued in June and stay away from material changes suggested for direct assignment of loans and residential mortgage-backed securities.

The final guidelines define securitisation as a structure where a pool of assets are transferred by an originator to a special purpose entity and the cash flow from this pool of assets is used to service securitisation exposures of at least two different tranches, reflecting different degrees of credit risk.

The rules, however, add that a pool consisting of a single asset will be also permitted for securitisation. This suggests that direct assignment of loans will continue to be seen as securitisation.

Another key proposal to ensure listing of residential mortgage-backed-securities has also not been included in the final rules.

Some of the other key elements of the final guidelines include:

Special Purpose Entity

• The special purpose entity is any company or trust created to carry out a securitisation transaction. The entity would hold the loans being securitised and also monitor and oversee the collection of repayments and dividends from the loan assets.

• Banks and other lenders originating a securitisation pool must maintain an arm's length distance from the SPE and should not hold any share capital.

• The originator should not have more than one representative without veto power on the board of the SPE, provided the board has at least four members and independent directors are in majority.

• The originator shall not support the losses of the SPE and shall also not be liable to meet the recurring expenses of the SPE.

• The SPE should be bankruptcy remote and non-discretionary.

What Qualifies For Securitisation

Securitisation exposures include:

• Exposures to securitisation notes issued by a special purpose entity, including asset-backed and mortgage-backed securities.

Transactions that do not qualify for securitisation include:

• Re-securitisation exposures.

• Structures in which short-term instruments such as commercial paper are issued against long term assets held by a SPE.

• Synthetic securitisation.

• Revolving credit facilities.

• Restructured loans and advances.

• Exposures to other lending institutions.

• Refinance exposures of All India Financial Institutions.

• Loans with bullet payments on principal and interest.

Residential Mortgage-Backed Securities

• Listing of RMBS generally above a certain threshold is recommended but not mandatory. The draft rules had recommended a mandatory listing for RMBS worth above Rs 500 crore.

• In the case of RMBS, the minimum retention period for the originator shall be 5% of the book value of the loans being securitised.

• A differential minimum holding period for RMBS, proposed in the draft, has not been included in the final guidelines.

• The minimum holding period for securitisation transactions has been set at three months for loans with up to two years tenor, while for other loans it has been set at six months.

Credit Enhancements

• The amount of credit enhancement extended at the beginning should be available to the SPE during the entire life of the securitisation notes.

• A credit enhancement which, for the investors, creates exposure to entities other than the underlying borrowers is called the external credit enhancement.

• At the time of reset, all the outstanding tranches of securitisation notes should be re-rated, other than equity tranches.