Securitisation norms not in line with Basel-II: Crisil

Rating agency Crisil has said the Reserve Bank of India's (RBI) guidelines on capital treatment for credit enhancements in securitisation deals are not in alignment with the capital allocation norms under Basel-II.

"Crisil believes that capital allocation should be driven by the level of risk and not by the owner of risk. Consequently, differential capital allocation for originators and third parties holding second loss pieces appears to be counterintuitive," the rating agency said in its report titled RBI's Securitisation Guidelines "� New Opportunities, Fresh Challenges.

Securitisation is a process by which banks sell assets to a remote special purpose vehicle (SPV) in return for an immediate cash payment.

The originators of the securitised assets also provide credit enhancements. The first loss credit enhancement is normally provided to ensure the securitised assets get an investment grade rating and the second loss enhancement is provided to get a higher rating.

Crisil said an alternative for the RBI could be to consider rating-based capital allocation for the entire credit enhancement as has been proposed for investments under the Basel II guidelines for banks.

This would ensure that the originators are motivated to transfer risks off their balance sheets without creating an asymmetry in the balance of risk to capital.

Base II guidelines are an improvement of the previous guidelines on capital allocation released by the Bank for International Settlement.

Apart from stipulating capital for credit and market risks, Basel II also requires banks to provide capital for operational risk.

The securitisation guidelines do not feature differential capital treatment for first and second loss credit enhancements, even though second loss credit enhancements are superior credit exposures.

RBI has stipulated that the first and second loss enhancements are to be deducted from the originator's Tier-I and Tier-II capital in a 50:50 ratio.

Crisil said an alignment of these guidelines with those released by the RBI on Basel II implementation for domestic banks will correct this asymmetry.

Further a triple-A rated investment by a bank under the Basel II guidelines will enjoy a risk weight of 20 per cent, whereas there is ambiguity as to whether a similar benefit will be enjoyed for investments in securitised assets.

The rating agency hoped that the RBI will provide the benefit of rating-based capital allocation to investors in securitised papers as well.

This will avoid excess capital allocation for the same risk, with both the originator and investors needing to provide high levels of capital for the same transaction.