RBI May Tweak Norms For Loan Sales

The Reserve Bank of India (RBI) is planning to do away with the minimum holding period (MHP) for sale of loans, deregulate the price discovery process and rationalise some of the existing conditions for sale of bad loans amid expectation that lenders could face increasing asset quality and liquidity pressures due the ripple impact the Covid-19 pandemic.

Further, to encourage securitisation of home loans, the central bank is planning to provide carve outs for lenders for Residential Mortgage Backed Securities (RMBS) vis-a-vis prescriptions such as minimum holding period (MHP), Minimum Retention Requirement (MRR) and reset of credit enhancements.

The above mentioned proposals are part of draft frameworks for securitisation of standard assets and sale of loan exposure, which the RBI issued on Monday.

Loan sales are resorted to by lenders for reasons ranging from strategic sales to rebalance their exposures or as a means to achieve resolution of stressed assets by extinguishing the exposures.

Securitisation involves transactions where credit risk in assets is redistributed by repackaging them into tradeable securities with different risk profiles which may give investors of various classes access to exposures which they otherwise will be unable to access directly.

As per the draft guidelines, the MHP (the minimum period for which an originator must hold the exposures before they can be transferred to a purchasing entity) will not be applicable to loans with tenor up to 24 months extended to individuals for agricultural activities where both interest and principal are due only on maturity.

This stipulation will also not be applicable to trade receivables with tenor up to 12 months discounted/purchased by lenders from their borrowers will be eligible for direct transfer through assignment.

In order to bring down the vintage of bad loans sold by lenders as well as to enable faster debt aggregation by Asset Reconstruction Companies (ARCs), lenders shall put in place board approved policy on adoption of an auction based method for price discovery.

In particular, once bids are received, the lender shall first invite the ARC, if any, or in the absence of such an ARC, any other financial institution, if any, which has already acquired highest significant stake to match the highest bid.

The RBI said the commitment of the ARC to redeem the securities shall be unconditional and not linked to the realisation of the assets.

The definition of securitisation has been modified to allow single asset securitisations. Securitisation of exposures purchased from other lenders has been allowed.

The draft guidelines prescribe a special case of securitisation, called Simple, Transparent and Comparable (STC) securitisations, with clearly defined criteria and preferential capital treatment.

Carve outs have been provided by the guidelines for Residential Mortgage Backed Securities (RMBS) -- securities issued by the special purpose entity against underlying exposures that are all residential mortgages.

This carve out is available in prescriptions regarding minimum holding period (six months or period covering six instalments whichever is later), minimum retention requirement (of the originator will be 5 per cent of the book value of the loans being securitised) and reset of credit enhancements.

A special case of securitisation, called Simple, Transparent and Comparable (STC) securitisations, has been prescribed with clearly defined criteria and preferential capital treatment.