RBI increases securitisation disclosure requirements

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The Reserve Bank of India (RBI) on Monday increased disclosure requirements for banks who sell securitised assets, to increase transparency for investors under the enhanced Basel II framework.

The RBI said banks needed to clearly state what role they had played in the securitisation of an asset, including whether they were an originator, investor, provider of credit enhancement or liquidity provider while securitising assets.

"In light of the wide range of risks arising from securitisation activities, which can be compounded by rapid innovation in securitisation techniques and instruments, minimum capital requirements calculated under Pillar 1 are often insufficient," RBI said.

The risks which needed to be addressed under securitisation include credit, market, liquidity, reputational risks, potential delinquencies and losses on underlying securitised exposures, exposures from credit lines, the central bank said.

Banks should state policies for recognising liabilities on their balance sheets for arrangements that could require them to provide financial support for securitised assets.

"Innovation has increased the complexity and potential illiquidity of structured credit products. This, in turn, can make such products more difficult to value and hedge, and may lead to inadvertent increases in overall risk," the RBI said.

The central bank also asked banks to quantify the aggregate amount of on-balance sheet and off-balance sheet securitisation exposures along with details on the type of exposure.

According to the master circular on the prudential guidelines on capital adequacy, banks have to set aside 50% from Tier-I capital and 50% from Tier-II for a securitised exposure.

The RBI also urged banks to incorporate forward looking capital planning that identified possible events or changes in market conditions that could adversely affect them.