RBI's final guidelines on securitisation, direct assignment

ICRA Research has come out with its report on RBI final guidelines on securitisation and direct assignment transactions- significant decline in volumes expected.

Background: The RBI, on 7 May 2012, has put out the final guidelines on securitisation and direct assignment of loan receivables. This is the first time the RBI has issued separate guidelines for Direct Assignment transactions. These guidelines are largely similar to the draft guidelines released in September 2011, other than some differences – the key ones pertain to Minimum Holding Period (MHP) requirement and credit enhancement reset. 

Impact Summary: The biggest impact of the Guidelines is expected to be on Direct Assignment transactions that formed about 75% of the market in FY2012 (as per ICRA’s estimates)). Under the Guidelines, no credit enhancement is permitted for these transactions. Given the prohibition on credit enhancement, the investing banks will be exposed to the entire credit risk on the assigned portfolio, which most banks may not be comfortable with. Hence the volume of such assignment transactions is expected to be severely affected.

One of the key objectives of the banks to acquire loan pools was to meet their Priority Sector Lending (PSL) targets, particularly post RBI’s Master Circular of July 2011 on Priority Sector Lending as per which loans by banks to NBFCs no longer qualify as PSL. Given that the need to meet PSL targets would continue to be there, banks could shift—at least partly- to the securitisation route to meet these targets. However, the deterrents to such a shift to securitisation are two-fold- high capital charge for Originators1 and impact of mark-to-market for the Investing Banks. Further, the unresolved issue of the Income Tax authorities’ claim of taxing the Special Purpose Vehicle (SPV) involved in securitisation transactions as a separate entity is another factor likely to constrain a wide-spread move towards securitisation.

Other key provisions of the Guidelines pertain to Minimum Holding Period (MHP) and Minimum Retention Requirement (MRR). These requirements are not expected to have any major impact on the securitisation or assignment of any underlying asset class, as these are relatively easy to comply with.

Investing banks are expected to stress test their securitisation investments / acquired portfolio and continuously monitor the same. Further, banks acquiring loan pools directly are expected to meet strict own due diligence requirements and have skilled manpower and systems to carry out the process. However, some banks may not have adequate systems or processes in place to comply with these requirements.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More