RBI Announces A New Market-Based Mechanism For Securitisation Of Stressed Assets

1. Portfolio of stressed loans where sum of squares of the relative shares (outstanding balance of each stressed loan ('L') to the total outstanding balance of the portfolio ('OB') is 0.30 or less;
2. The Draft Framework does not clarify if OB will include the non-stressed loans which form part of the 'portfolio';
3. Sum of outstanding exposures in the underlying pool classified as non-performing asset must be equal to or higher than 90% of the total outstanding amount;
4. If standard assets are added to the pool, then the negative list of assets prescribed under the RBI (Securitisation of Standard Assets) Directions, 2021 ('Standard Assets Securitisation Directions') needs to be adhered to; and
5. While stressed loans have not been defined under the Draft Framework, the term 'stressed loan' has been defined under the RBI (Transfer of Loan Exposures) Directions, 2021, to mean loans classified as non-performing assets and special mention accounts.

The underlying loans in each pool must be homogenous. The following two categories of loans should not be mixed as a part of the same pool:

1. loans to micro enterprises, and personal loans and business loans to individuals not exceeding INR 50 Crores (approximately USD 5,900,000) ('Para 6(a) Loans'); and
2. all other loans.

Lenders must not undertake securitisation activities or assume securitisation exposures as mentioned below:

1. Re-securitisation exposures; and
2. Securitisation of following assets:
   
   • Exposures to other lending institutions;
   • Refinance exposures of AIFIs;
   • Farm credit;
   • Education loan;
   • Accounts identified as fraud/red flagged account; and
   • Accounts identified as or being examined for willful default.

As mentioned above, the standard assets negative list will additionally apply for standard assets forming part of this securitisation.

1. Maximum retention of 20% of the total securitisation exposure of any scheme or structure by the originator;
2. Any exposure of the originator above 10% and not exceeding 20% to be recognised as a first loss piece for prudential purposes; and
3. No mandatory requirement of maintaining Minimum Risk Retention (except where the originator is the resolution managers ('ReM').

Investors in securitisation portfolios whose underlying loans are not Para 6(a) Loans should:

1. not be disqualified under Section 29A of the Insolvency and Bankruptcy Code, 2016 ('IBC'); and
2. not be related parties of the borrowers.

Special Purpose Entity ('SPE') must ensure:

1. compliance with Part G (Condition to be satisfied by the SPE) of the Standard Assets Securitisation Directions; and
2. compliance with Part H (Representations and Warranties) of the Standard Assets Securitisation Directions.

1. Inclusion of ReMs as facility providers responsible for administering resolution/recovery of the underlying stressed exposures;
2. ReM to effectively resolve the stressed assets and maximise the realisation of value;
3. ReM shall not be a related party of the originator (expect as provided in (a) below) or a person disqualified under Section 29A of the IBC; and
4. Appointment of ReM:
   
   1. Securitisation transactions with underlying assets comprising of Para 6(a) Loans:
      
      • SPE to mandatorily appoint an RBI regulated entity (scheduled commercial banks (excluding regional rural banks), ARCs, and NBFCs including HFCs);
      • Originator may also undertake responsibility of ReM in respect of loan exposures transferred by it (subject to retention of atleast 5% of the total securitisation notes.
   2. Securitisation transactions with underlying assets comprising of other loans:
      
   3. • In addition to the entities mentioned above, SPE may also appoint any entity registered with a financial sector regulator in India, insolvency professionals registered with Insolvency and Bankruptcy Board of India or an insolvency professional entity.

1. Sale of assets to SPE only on cash basis, as per mutually determined price, and the sale consideration should be received not later than the transfer of the assets to the SPE;
2. The loans can be taken out of the books of the transferor only on receipt of the entire sale consideration;
3. The originator must incorporate price discovery methodology as part of their policy to ensure that the realisable value of underlying stressed loans is reasonably estimated in a fair and transparent manner; and
4. The originator must obtain two external valuation reports before securitisation of pool of assets (which do not pertain to Para 6(a) Loans).

Supporting facilities in form of credit enhancement, liquidity facilities, and servicing facilities to securitisation of stressed assets available, subject to the provisions contained in Standard Assets Securitisation Directions.

Credit enhancement (other than contractual risk retention or permissible first loss default guarantee) to be restricted to losses of senior tranche only.

The Draft Framework specifies reporting requirements on the SPE to the RBI.

The Draft Framework additionally specifies disclosure norms to be complied with as part of the offer documents as well as disclosure to investors in the structure on an ongoing basis.