The Reserve Bank of India (“RBI”) on 24th September 2021, issued the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 (“Master Directions”). These Master Directions repeal the existing RBI guidelines on securitisation of standard assets. The Master Directions apply to the following entities:

• all Scheduled Commercial Banks (including Small Finance Banks but excluding Regional Rural Banks);
• all all-India Term Financial Institutions (NABARD, NHB, EXIM Bank and SIDBI); and
• all Non-Banking Financial Companies (“NBFCs”) including Housing Finance Companies (“HFCs”).

The Master Directions have evolved from the ‘Draft Framework for Securitisation of Standard Assets’ which was released by the RBI on 8th June 2020, wherein the aim was to align the regulatory framework surrounding the securitisation regime with Basel III requirements and deepen the secondary loan trading market. The Master Directions have also taken into account the recommendations of the Committee on Development of Housing Finance Securitisation Market in India (Chair: Dr. Harsh Vardhan) and the Task Force on the Development of Secondary Market for Corporate Loans (Chair: Shri T.N. Manoharan) (“Task Force”) which were set up by the RBI in May 2019. One of the key components of the Task Force's recommendation was to separate the regulatory guidelines for direct assignment transactions from the securitisation guidelines and treat it as a sale of loan exposure. To that effect, the guidelines for direct assignment transactions, which formed part of the repealed securitisation guidelines, have been separated from the securitisation guidelines and subsumed under a separate set of guidelines on transfer of loan exposures including stressed loans or loan exposures classified as fraud.

This article aims to briefly summarise and highlight key components of the Master Directions and its subsequent implication on the banking and financial sector.

Basic Deviations:

• The Master Directions permit single asset securitisation which was prohibited under the erstwhile guidelines. It is interesting to note that securitisation of single assets was common prior to the 2012 Guidelines pursuant to which it was not allowed. However, exposures to other lending institutions can no longer be securitised.
• In a major deviation from the repealed guidelines, the Master Directions have now revised the minimum holding period (“MHP”) and minimum retention requirement (“MRR”) for the assets being securitised. While a 12-month MHP is no longer required for residential mortgage-backed securitisations and the MHP is no more linked to repayment frequency but to the tenor of the loan, the percentage of MRR to be maintained has not undergone any revision. However, an exception has been carved out for residential mortgage-backed securitisation wherein only a 5% MRR is required to be maintained irrespective of the original maturity.

In addition to the above, overcollateralization is no longer considered as a form of MRR.

Accordingly, MRR may be achieved by issuance of equity tranches or pari passu investment in senior tranches.

• The timelines for credit enhancement reset for residential mortgage-backed securities have also been reduced.
• The risk weights for high rated senior tranches have been reduced while the risk weights of junior tranches are higher.

New Inclusions:

• Investment threshold for securitisation notes will be at a minimum of INR 10 million. If the securitisation notes are offered to more than 50 persons, it will have to be listed as per the terms of the Securities and Exchange Board of India (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (as amended).
• Simple, transparent, and comparable securitisation (“STC”)

Under the Master Directions, two methods of securitisation have been introduced:

• STC securitisations; and
• non-STC securitisations.

STC compliance permits alternative capital treatment and the compliance itself is primarily linked to enhanced transparency requirements. STC transactions enable lower risk weights effectively leading to higher yields. Hence originators undertaking securitisation on an ongoing basis may consider securitisation that is STC compliant.

• The provision relating to credit monitoring and valuation has been revised under the Master Directions. Board approved policies for the valuation of securitisation notes need to be put in place. Lenders need to now put in place formal procedures to assess the risk profile of the underlying assets. They also need to monitor on an ongoing basis and in a timely manner, performance information on the exposures underlying their securitisation positions and take appropriate action, if any, required.
• Under the provisions of the Master Directions, holders of securitisation notes can now pledge or trade their holding without any restriction unless the restriction is imposed by a statutory or regulatory risk retention requirement.
• Further, assets purchased from other lenders can now also be securitised including securitisation of trade receivables is now specifically provided for. Assets purchased from other lenders can now be securitised. This inclusion can help in repackaging and risk diversification. In this regard it has also been clarified that the conditions of separation from the transferred asset applicable to the originator shall apply to such lender from whom the asset is purchased although only either of such lender or originator can have a representative on the board of the special purpose entity.
• The Master Directions envisage a new requirement that there should not be a gap of more than 30 days between transfer of the assets and the issuance of securitisation notes.
• The Master Directions have expressly provided for:
• mortgage-backed securitisation;
• replenishment structures; and
• securitisation of trade receivables.

It should be noted that while securitisation for the above structures were being undertaken in the past, an express provision has now been included.

In a nutshell:

Following in the footsteps of the global market, the securitisation market in India has steadily evolved over the years. The Master Directions is a step in this direction. While certain provisions thereunder remain ambiguous and curtail otherwise emerging structures, undoubtedly, the changes introduced will result in more transparent securitisation structures and give an impetus to the Indian financial sector. In this backdrop, we anticipate innovative structures, specifically in relation to mortgage-backed securitisation, replenishment structures, single asset securitisation to name a few.

All in all, the Master Directions are a nod from the regulator towards a more developed structured finance market, hopefully resulting in a steady increase of securitisation deals in the Indian market.

Authors:

Ankit Sinha
Partner, Juris Corp
Email: [email protected]

Teza Jose
Principal Associate, Juris Corp
Email: [email protected]

Disha Saxena
Associate, Juris Corp
Email: [email protected]