RBI rule on loan securitisation

RBI rule on loan securitisation

Subject : Economy

Context: Reserve Bank of India (RBI) issued new guidelines prohibiting securitization of loans with a residual maturity of less than a year.

Details:

Prohibiting short-term securitization would affect about 5% of the market, especially the  gold loan financiers and microfinance institutions (MFI).

Concept:

• Securitization is the pooling of assets into repackaged interest-bearing securities.
•  The Reserve Bank of India (RBI) formulated guidelines in 2006 for governing securitisation of standard assets.
  • Standard assets (or performing assets) -assets where amounts due have not been outstanding for more than 90 days.
  • The regulatory framework provided in the guidelines covers securitisation of standard assets by banks, All India Term Lending and Refinancing Institutions, and Non Banking Financial Companies (including RNBCs).
  • Securitisation follows a two-stage process:
    •  In the first stage there is sale of single asset or pooling and sale of pool of assets to a ‘bankruptcy remote’ special purpose vehicle (SPV) in return for an immediate cash payment
    • In the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradable debt securities.
  • The Securitisation Guidelines prescribe a minimum retention requirement of 5 per cent to 10 percent of the assets being securitised.
  • The assets are held on the books of the originator for a minimum period prior to securitisation.
  • The Securitisation Guidelines stipulate certain assets that cannot be securitised, including securitisation exposures, revolving credit facilities and loans with bullet payment.
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 deals with resolving, restructuring and securitisation of non-performing assets (NPAs).
  • Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, mandates that only Banks and financial institutions can securitise their financial assets.

Central Registry of Securitisation Asset Reconstruction and Security Interest of India-CERSAI

• It has been established as a company under section 8 of the Companies Act, 2013 by the Government of India. 
• The object of the company is to maintain and operate a Registration System for the purpose of registration of transactions of securitisation, asset reconstruction of financial assets and creation of security interest over property, as contemplated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
• CERSAI was formed to identify and check fraudulent activity in lending transactions against equitable mortgages i.e to discourage and prevent the practice of taking out various loans from several banks using the same asset or property.
• Major shareholders-51% by the Central Government and rest by select Public Sector Banks and the National Housing Bank.