RBI Sets The Stage For Listed Residential Mortgage-Backed Securities

The Reserve Bank of India is proposing to carve out differential guidelines for residential mortgage-backed securities and set the stage for their listing. That’s according to a new draft framework for ‘Securitisation of Standard Assets’ issued on Monday.

After deliberations and recommendations by a Committee and Task Force last year, the RBI has put out a new draft framework, calling for suggestions till June 30.

The key changes include a revised definition of securitisation, which excluded ‘direct assignment’ loan sales. “Only transactions that result in multiple tranches of securities being issued reflecting different credit risks will be treated as securitisation transactions,” the draft said. “Definition of securitisation has been modified to allow single-asset securitisations. Securitisation of exposures purchased from other lenders has been allowed.”

Residential Mortgage-Backed Securities

• The RBI has proposed a minimum holding period for RMBS transactions at six months or six installments.
• For such securities, a minimum retention rate of 5% of the book value of the loans being securitised has been proposed.
• The RBI has proposed mandatory listing for home-loan backed assets if the loan-pool value is equivalent to Rs 500 crore or above. For RMBS worth less than Rs 500 crore, listing may be optional. The RBI has sought views on this.

Securitisation Other Than RMBS

• Under the draft framework, for loan assets with up to two years the minimum holding period has been set at three installments. For loans over two years the MHP has been set at six installments.
• For loans with a maturity of 24 months or less the minimum retention rate is proposed at 5% of the book-value. It has been set at 10% for loans with a maturity of over 24 months.
• A lenders cannot be exposed by more than 20% of the securisation exposure of any tranche or structure of securisation transactions.

Special Purpose Entity

• Assets to be securitised must be transferred to a special purpose entity.
• The RBI has termed special purpose entities as any corporation, trust or entity as organisations that perform the role of monitoring and overseeing the collection of repayments and dividends from the loan-assets that have been securitised.
• Under the draft framework, the RBI has said lenders should maintain an ‘arm’s length basis’ with SPEs and shouldn’t influence its functioning, directly or indirectly.
• It has said that lenders must sell assets to the SPE only on a cash basis and the sale consideration should be received not later than the transfer of the asset to the SPE.
• The SPE has been made bankruptcy remote and the originator does not maintain any direct or indirect control over the transferred loan-assets.
• Indian lenders cannot undertake or invest in resecuritisation transactions, synthetic securitisation and some securitisation transactions involving revolving credit facilities.

Credit Enhancements

• The credit enhancement amount should be available throughout the lifetime of the transaction and will lead to all outstanding tranches of securities being re-rated.
• Credit enhancements can be reset, which means that originators can add new securities against the loan-tranche to maintain or improve their credit rating. This is not allowed, if the credit quality of any tranche of the transaction has deteriorated.
• If the reset is permitted, all the loan tranches have to be re-rated by the same ratings agency that gave the transaction a rating initially.

Other Aspects

• Agricultural loans, where the interest and principal are due only on maturity or trade receivables with a tenor up to 12 months, can be securitised.
• Lenders in India aren’t allowed to participate in securitisation with revolving credit facilities, such as credit card loans or working capital facilities, as the underlying loan exposure.
• Synthetic securitisation transactions, which include structures where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of credit derivatives or guarantees, is also not permitted for Indian lenders.