Over the past few years, the Indian govt has been focusing to develop the securitisation market by providing a robust regulatory mechanism. This particularly happened after NBFC crises like that of IL&FS and DHFL, which accelerated the need to provide alternate sources of funding to Indian corporates. The Indian regulator is also interested in enhancing participation from foreign portfolio investors (FPIs) in securitisation transactions.
The regulator for securitisation of performing and non-performing assets is RBI. When it comes to performing assets, the market is governed by the following RBI guidelines:
- The Guidelines on Securitisation of Standard Assets, 2006
- The Guidelines on Securitisation Transactions, 2012
- Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021
The recent among these brought significant winds of change with respect to the development of a robust secondary market. It is to be noted that the provisions in the new guidelines are applicable to banks, all NBFCs, including housing finance companies (HFCs), NABARD, NHB, EXIM Bank, and SIDBI.
The latest guidelines, issued last September, expect to result in improved transparency, risk-based pricing, and deepening of the market. The introduction of STC (Simple, Transparent, and Comparable) concept should enable better risk assessment, benchmarking, and pricing with criteria around minimum track record and performance history of 5 years and 7 years for retail and non-retail exposures, respectively.
The residential mortgage backed securities (RMBS) expects to prosper with relaxation in Minimum Holding Period (MHP) — the duration for which a bank or NBFC is required to hold the loans on its book before selling them — and reduction in Minimum Retention Ratio (MRR) — which is designed to ensure that the originators have a continuing stake in the performance of securitised assets so that they carry out proper due diligence of loans to be securitised for RMBS.
Given the regulatory climate and advantages that the securitisation market pose, what opportunities exist for the market in India and how to tap them? In the next post, we will answer these questions.
The views provided in this blog are the personal views of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.