The paper broadly covers nine relevant areas of the framework including asset universe, asset eligibility and minimum risk retention
The Reserve Bank of India (RBI) on January 25 released a discussion paper seeking feedback on framework for Securitisation of Stressed Assets Framework (SSAF).
The discussion paper broadly covers nine relevant areas of the framework including asset universe, asset eligibility, minimum risk retention, regulatory framework for special purpose entity and resolution manager, access to finance for resolution manager, capital treatment, due diligence, credit enhancement, and valuation.
“It draws upon similar frameworks introduced in other jurisdictions, while trying to keep it structurally aligned with the framework for securitisation of standard assets,” the RBI said in a release.
The RBI, in September, announced in the Statement on Developmental and Regulatory that a Discussion Paper (DP) detailing relevant contours of the proposed framework on Securitisation of Stressed Assets (SSAF).
Securitisation involves pooling of loans and selling them to a special purpose entity (SPE), which then issues securities backed by the loan pool.
What does the discussion paper say?
The central bank in the discussion paper said in that terms of the extant instructions on Securitisation of Stressed Assets (SSA), eligible standard assets include those in the special mention account (SMA) category.
“Securitisation involving only NPAs may have uncertain cash flows, mainly dependent on recoveries from underlying assets and issuance of securitisation notes on those underlying assets may not have regular servicing, which may be a limiting factor for the universe of investors,” the release said.
Internationally, a limited window is permitted for inclusion of non-NPA (standard) assets for structuring purposes.
The requirement of Minimum Risk Retention (MRR) in case of SSAF, the objective of the originator is to transfer the NPAs from their books where they may no longer wish to be associated with the transferred assets in any way.
As these assets have already defaulted, the origination standards may have limited role in determining chances of recovery, and hence economic interests of originator may not always align with that of investors, according to the paper.
Further, the central bank said the role of special purpose vehicle and Resolution Manager (RM) is central to the SSAF wherein they are directly responsible for resolution and recovery of underlying stressed pool, it is desirable that they should be within the regulatory purview of Reserve Bank.
On access of Finance to Resolution manager front, the central bank said under SSAF, resolution or recovery of stressed assets is envisaged to be carried out by an independent RM.
“The resolution effort may require additional/interim finance to meet administrative, operational, and other expenses required to kick-off the resolution/recovery plans,” the RBI said in a release.
The underlying pool of assets in SSAF have the distinctive pre-eminent risk of incorrect valuation of the NPAs and information asymmetry at the time of transfer from originator to SPE, the capital requirement for securitisation notes in SSAF needs to be markedly different from SSA.
The release further said that due diligence is essential for the investors to satisfy themselves regarding the quality of the underlying pool based on the loan-level information. With proper due diligence, the information asymmetry between the originator and potential investors is expected to be minimized.
The RBI has invited feedback and suggestions on this paper by February 28.
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