The Reserve Bank of India today issued draft norms prescribing the minimum period for which banks should hold loans on their books before securitising these. It has also set guidelines for retaining on their books the portion of the loan which is securitised.
This is being done to give comfort to investors regarding the due diligence exercised by the originator. This is expected to better align incentives and ensure more effective screening of loans, RBI said.
The minimum holding period for loans with maturity of up to 24 months would be nine months. The condition would be applicable where payments are made periodically.
Securitisation involves the pooling of assets and the subsequent sale of cash flows from these asset pools to investors. The securitisation is intended to redistribute the credit risk away from the originators to a wide spectrum of investors who can bear the risk. It is expected to aid in financial stability and provide an additional source of funding.
Referring to the minimum retention period, RBI said banks would have to retain minimum five per cent of the book value of loans (being securitised) which have original maturity of 24 months or less.
The guidelines have been revised on the back of learning from the recent global financial crisis. RBI said while the securitisation framework in India has been reasonably prudent, certain imprudent practices have reportedly developed like origin of loans with the sole intention of immediate securitisation.
In some instances, tranches of project loans are securitised even before the total disbursement is complete. Such practice passes on the project implementation risk to investors.
RBI also mulls extending minimum holding and retention norms to non-banking finance companies to have the level-playing field and remove undesirable arbitrage opportunities.
The total exposure of banks to the special purpose vehicles (SPVs) and/or securitised assets should not exceed 20 per cent for transactions undertaken after date of this circular. The investment in equity, subordinate and senior tranches of securities issued would be governed by this norm.
