Introduction
On April 09, 2025, the Reserve Bank of India ("RBI") has issued its 'Statement on Developmental and Regulatory Policies' in which it has issued the draft of the Reserve Bank of India (Securitisation of Stressed Assets) Directions, 2025 (the "Draft Securitization Framework"), and has invited comments from all stakeholders to the Draft Securitization Framework latest by May 12, 2025.
At present, in India, securitization of non-performing loans occurs only with the involvement of asset reconstruction companies ("ARCs") under the (Indian) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"). In order to bolster investment and competition in resolution of stressed assets in India and to provide an alternative route for exit of lenders from their investments in non-performing loans, RBI seeks to provide a market-based mechanism for securitization through bankruptcy remote special purpose entities or trusts ("SPEs") in line with the guidelines for securitization of non-performing loans as issued by the 'Basel Committee on Banking Supervision (BCBS)'.
In this background, it is our endeavour to highlight some key nuances with respect to such proposed framework, and to analyse its potential impact on industry and market participants and on financing transactions.
Overview of the Draft Securitization Framework and key differences with the ARC-route
Pools of stressed assets: As per the Draft Securitization Framework, scheduled commercial banks (as well as their overseas branches) and non-banking financial companies ("NBFCs") can securitize 'pools of stressed assets', in which at least 90% exposures are classified as non-performing assets ("NPAs") and where the sum of squares of the ratios of the outstanding balance of each loan being securitized to the overall outstanding of the pool is 0.30 or less. Such requirement has been specified so that the pools being securitized comprise of a minimum quantum of loans for averaging recoveries across the pool, and allow securitization of non-NPA loans, which would have better recovery rates to also form part of the pool, in addition to NPA loans as part of the same pool. Under the ARC-route, all loans which are classified as special mention account(s) i.e. any loans which are in default, but period of default is less than 90 days, and NPA loans, can be securitized.
Homogenous pool: Such pools of stressed assets being securitized should be homogeneous to enable better assessment of cashflows and recovery patterns, and hence: (i) personal loans, business loans and loans to micro, small and medium enterprises (MSMEs) not exceeding INR 50,00,00,000/-; and (ii) all other loans cannot be mixed as part of the same pool. This requirement ensures that recovery rates at the pool level can be better ascertained, and such securitization structures are not opaque, since recovery rates for unsecured and secured loans are likely to be different. Such requirements are not applicable presently to the ARC-route.
Assets that cannot be securitised: Re-securitization exposures, lending to other financial institutions, refinancing exposures of All-India Financial Institutions such as National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB), Export-Import Bank of India, Small Industries Development Bank of India (SIDBI) etc., agriculture loans and farm credit, education loans, red-flagged and fraud accounts, and wilful defaulter classified accounts are part of the 'negative list' of loans/facilities which cannot be securitized under this route. Under the ARC-route, even red flagged accounts and fraudulent accounts can be securitized, which is not permitted under the Draft Securitization Framework.
Minimum risk retention (MRR) for originators: There is no minimum risk retention requirement (MRR) for the originator under the Draft Securitization Framework. However, requirement of MRR may be contractually agreed to for the transaction.
The total exposure of an originator to the securitisation exposures belonging to a particular securitisation structure or scheme should not exceed 20% of the total securitisation exposures created by such structure or scheme. Under the ARC-route, no such limit for investment by originators in security receipts issued by the ARC or its trust has been prescribed, and such securitization transactions have traditionally happened under the 15:85 structure, where 85% of the consideration is in the form of security receipts or 'payable-when-able' instruments.
Resolution Managers: RBI has also provided for a separate class of facility providers under the Draft Securitization Framework i.e. 'resolution managers' who have experience in resolution of NPAs who can be appointed by SPEs to provide such services/facilities for recovery and enforcement. This may encourage development of resolution experts and service providers in India, in addition to ARCs, who have expertise in resolution of non-performing loans and who can provide such services in exchange for a fee. Under the ARC-route, it is the ARC who acts as the 'resolution manager' and can appoint third-party resolution agents for recovery.
Other key difference(s) between such securitization of stressed assets and securitization through the ARC-route: Under the Draft Securitization Framework, only cash consideration has been permitted, while securitization through the ARC-route also occur on 'cash plus security receipt' basis i.e. as part of the acquisition consideration of the originator of such loans receives both cash as well as security receipts issued by the ARC and/or the trusts settled by the ARC.
Under the Draft Securitization Framework, no specific compliance requirements for investors have been specified. Investors in securitization notes issued under such securitization route cannot be related parties to the borrowers of underlying loans being securitized and must not be disqualified under Section 29A of the (Indian) Insolvency and Bankruptcy Code, 2016 with reference to the borrower/obligor entity for the underlying loans.
However, under the ARC-route, such investors must also be 'qualified buyers' as per the SARFAESI Act i.e., financial institutions, insurance companies, banks, state financial corporations, state industrial development corporations, asset reconstruction companies and their securitization trusts, mutual funds, foreign institutional investors, foreign portfolio investors, alternative investment funds etc.
The securitization notes issued by the SPE are required to be amortized/written down over a period of 5 years assuming that such stressed loans would likely be resolved by then and any salvageable value of collateral would be largely deteriorated if resolution is not possible within such timeframe. Such resolution period is in line with the resolution period generally applicable for ARC-led resolutions as stipulated by RBI. However, under the ARC-route, such resolution period can be extended in certain scenarios to up to 8 years with approval of the board of directors of the ARC, which is not provided for under the Draft Securitization Framework.
The Draft Securitization Framework also permit provision of credit support for the securitization structure such as credit enhancement facilities, liquidity facilities and underwriting facilities, which are generally not undertaken in securitization under the ARC-route.
Under the ARC-route, for transfer of loan exposures of an amount in excess of INR 100,00,00,000/-, price discovery must be undertaken by the transferor lender under a 'Swiss Challenge' auction process. However, as per the Draft Securitization Framework, the price discovery methodology only has to be compliant with the board policy of the originator and must be fair and transparent. For loans, other than personal loans, business loans and loans to micro, small and medium enterprises (MSMEs), valuation report(s) from 2 external valuers are required to be obtained.
Under the ARC-route, clear requirements and specifications for provisioning of financial assets by ARCs have been prescribed. However, the Draft Securitization Framework are silent on provisioning requirements for pools of stressed loans which are acquired by the SPE.
In case underlying pools of stressed assets are not compliant with the pool selection criteria, the Draft Securitization Framework prescribe a period of 120 days from acquisition, for any re-purchase of such pools by the originator, while such period of re-purchase is 30 days under the ARC-route.
ARCs and their securitization trusts are recognized secured creditors under the SARFAESI Act, and hence, enforcement of security interest without intervention of courts under Section 13 of the SARFAESI Act and other measures for asset reconstruction under Section 9 of the SARFAESI Act (including change of control and management of the borrower, conversion of debt into equity etc.) is a statutorily enshrined available option to investors under the ARC-route. It remains to be seen whether corresponding amendments are also made to the SARFAESI Act to recognize SPEs undertaking securitization as per the Draft Securitization Framework as being secured creditors for the purposes of SARFAESI Act. Such amendments will be critical to provide teeth in case of recovery and enforcement actions for securitized pools of secured loans especially mortgage loans, as cashflows from such recovery and enforcement actions will prove critical for servicing the pools assigned in such securitization.
Conclusion
Lenders often offload their non-performing loans to ARCs but recovery rates and resolution success rates through such route have largely been low, due to various reasons including that vintage non-performing loans with low chances of recoverability are often securitized, additional funding for borrowers cannot be provided by ARCs and holistic resolutions of such borrowers and such stressed loans are often not possible to be implemented without concurrence with other lenders and creditors under a contractual framework.
The Draft Securitization Framework of RBI for securitization of stressed assets aims to provide an alternative prudential framework and investment route for investors to acquire and invest in exposures with repackaged cashflows and varying risk profiles. Such framework proposes to develop a robust and sophisticated debt offtake and securitization market in India and to encourage higher investment, participation and competition in turnaround and resolution of stressed assets which will in turn aid recovery and exits for lenders and reduce cost of capital and cost of borrowing which is beneficial for the Indian economy.
While RBI has indicated that it intends to notify the framework for securitization of stressed loans, it remains to be seen whether such measures will also be backed by necessary amendments to the SARFAESI Act to provide necessary teeth for enforcement actions. For securitization of stressed loans, proper conduct of detailed due diligence to ascertain recoverability and viability of such investments will be critical.
Further, since the ambit of SPE is broad under the Draft Securitization Framework, clarity would be required to be provided by RBI as to whether ARCs and their securitization trusts would have to additionally comply with the requirements specified under Draft Securitization Framework, once these are notified, from a regulatory arbitrage standpoint. Also, it remains unclear presently whether any specific registration requirements must also be complied with by investors and 'resolution managers' under such securitization route. It also remains to be seen whether the introduction of a new class of facility providers i.e. the 'resolution managers' encourages development of experts and specialists who have experience in turnaround of assets and recovery in India as is prevalent globally which will be critical to the efficacy of the framework.
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