The Reserve Bank of India (RBI) on Tuesday extended the guidelines on securitisation of standard assets (loans), which had earlier been issued to banks, to non-banking finance companies (NBFCs) also, stipulating that originating NBFCs can securitise loans only after it had been held by them for a minimum period in their books.

These guidelines were issued to prevent unhealthy practices surrounding securitisation, such as, origination of loans for the sole purpose of securitisation and in order to align the interest of the originator with that of the investors and redistribute credit risk to a wide spectrum of investors.

“It was felt necessary that originators should retain a portion of each securitisation originated and ensure more effective screening of loans. In addition, a minimum period of retention of loans prior to securitisation was considered desirable, to give comfort to the investors regarding the due diligence exercised by the originator,” the RBI said in a notification.

MINIMUM HOLDING PERIOD

While implementing a minimum holding period (MHP), the RBI said that the project implementation risk is not passed on to the investors, and a minimum recovery performance is demonstrated prior to securitisation to ensure better underwriting standards. NBFCs can securitise loans only after a MHP counted from the date of full disbursement of loans for an activity / purpose; acquisition of asset (that is, car, residential house) by the borrower or the date of completion of a project, as the case may be. MHP would be also defined with reference to the number of instalments to be paid prior to securitisation.

Trade receivables with tenor up to 12 months discounted/purchased by NBFCs from their borrowers will be eligible for securitisation.

Further, the RBI said that a minimum retention requirement (MRR) would be applicable to ensure that the originating NBFCs have a continuing stake in the performance of securitised assets so as to ensure that they carry out due diligence of loans to be securitised. In the case of long-term loans, the MRR may also include a vertical tranche of securitised paper in addition to the equity / subordinate tranche, to ensure that the originating NBFCs have stake in the performance of securitised assets for the entire life of the securitisation process.

ACCESS TO DATA

Where the repayment is at more than quarterly intervals, loans can be securitised after repayment of at-least two instalments.

The RBI also stipulated that originating NBFCs should disclose to investors the weighted average holding period of the assets securitised and the level of their MRR in the securitisation. The originating NBFCs should ensure that prospective investors have easily available access to all materially relevant data on the credit quality and performance of the individual underlying exposures, cash flows and collateral supporting a securitisation exposure.

The purchasing NBFCs need to monitor on an on-going basis performance information on the loans purchased and take appropriate action required, if any, said RBI. (The Hindu)