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The Reserve Bank of India (“RBI”) on 24th September 2021, issued the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 (“Master Directions”). These Master Directions repeal the existing RBI guidelines on securitisation of standard assets. The Master Directions apply to the following entities:
The Master Directions have evolved from the ‘Draft Framework for Securitisation of Standard Assets’ which was released by the RBI on 8th June 2020, wherein the aim was to align the regulatory framework surrounding the securitisation regime with Basel III requirements and deepen the secondary loan trading market. The Master Directions have also taken into account the recommendations of the Committee on Development of Housing Finance Securitisation Market in India (Chair: Dr. Harsh Vardhan) and the Task Force on the Development of Secondary Market for Corporate Loans (Chair: Shri T.N. Manoharan) (“Task Force”) which were set up by the RBI in May 2019. One of the key components of the Task Force’s recommendation was to separate the regulatory guidelines for direct assignment transactions from the securitisation guidelines and treat it as a sale of loan exposure. To that effect, the guidelines for direct assignment transactions, which formed part of the repealed securitisation guidelines, have been separated from the securitisation guidelines and subsumed under a separate set of guidelines on transfer of loan exposures including stressed loans or loan exposures classified as fraud.
This article aims to briefly summarise and highlight key components of the Master Directions and its subsequent implication on the banking and financial sector.
In addition to the above, overcollateralization is no longer considered as a form of MRR.
Accordingly, MRR may be achieved by issuance of equity tranches or pari passu investment in senior tranches.
Under the Master Directions, two methods of securitisation have been introduced:
STC compliance permits alternative capital treatment and the compliance itself is primarily linked to enhanced transparency requirements. STC transactions enable lower risk weights effectively leading to higher yields. Hence originators undertaking securitisation on an ongoing basis may consider securitisation that is STC compliant.
It should be noted that while securitisation for the above structures were being undertaken in the past, an express provision has now been included.
Following in the footsteps of the global market, the securitisation market in India has steadily evolved over the years. The Master Directions is a step in this direction. While certain provisions thereunder remain ambiguous and curtail otherwise emerging structures, undoubtedly, the changes introduced will result in more transparent securitisation structures and give an impetus to the Indian financial sector. In this backdrop, we anticipate innovative structures, specifically in relation to mortgage-backed securitisation, replenishment structures, single asset securitisation to name a few.
All in all, the Master Directions are a nod from the regulator towards a more developed structured finance market, hopefully resulting in a steady increase of securitisation deals in the Indian market.
Ankit Sinha
Partner, Juris Corp
Email: ankit.sinha@jclex.com
Teza Jose
Principal Associate, Juris Corp
Email: teza.jose@jclex.com
Disha Saxena
Associate, Juris Corp
Email: disha.saxena@jclex.com