Stricter securitised asset sales norms on the cards for banks

Commercial banks would have to follow stringent accounting norms in future on sales of assets through securitisation. The Indian Banks Association (IBA) is framing draft guidelines for uniform accounting treatment of securitisation assets.

Considering the growing volumes in the securitisation market, the Reserve Bank of India (RBI) had asked the IBA to frame standardised guidelines for originating banks.

Securitisation is pooling and repackaging of homogeneous illiquid financial assets into marketable securities that can be sold to investors.

The premier bankers' body in the country is likely to recommend higher capital allocation for interest retained in securitised assets, sources said. In addition, banks would also have to disclose the impact of securitisation of assets on their capital adequacy ratio (CAR).

"We are planning to take up the issue of capital relief and off balance sheet treatment of securitised assets with the RBI," said a senior IBA official.

The bankers' body has had two meetings with a string of banks including State Bank of India, HDFC Bank, ICICI Bank, Centurion Bank, Citibank and HSBC, said senior IBA officials.

Securitisation is intended to be a true sale and therefore post securitisation the assets have to go off balance sheet. This has been achieved in most transactions and the Institute of Chartered Accountants of India came up with a guidance note which clearly recognises the off-balance sheet treatment if the risks and rewards of the assets have been transferred.

However, an area where ambiguity continues to exist is regarding accounting for the gain from securitisation where there are significant differences between players, said the official.

The IBA is planning to formulate uniform income recognition norm for all banks on sale of assets through securitisation.

Regarding capital relief, there are two aspects. The first is whether the transaction has resulted in substantial risk transfer and hence eligible for capital relief.

On this matter, there is a common view that most transaction does result in a high level of risk transference and are therefore eligible for capital relief, said the IBA official.

The second aspect relates to the extent of capital to be allocated by banks' for the retained interest in securitisation.

Most securitisation transactions create at least two classes of securities, one of which is senior and sold to investors, the other being junior and often retained by seller.

While it is generally accepted that the junior piece is typically very high risk and should have a high capital allocation. The association is expected to recommend higher risk weightage to junior tranche, said the official.