On Monday, the reserve bank Of India came out with a new set of guidelines on securitization which includes revision in the definition of securitization and the difference between mortgage loans, simplifying regulations.
The definition of securitization has been reshaped to permit single asset securitization against the multiple asset securities allowed in current norms. According to new guidelines from RBI. From other lenders, securitization of exposures can be purchased. Banks are required to maintain a part of the loan which is sold in their books.
According to new guidelines, the requirement of MRR for the sale of loans is not required anymore. Monthly Recurring Revenue (MRR) is primarily designed to make sure that originating bank or NBFC has an unbroken stake within the performance of securitized assets so as to make sure that they perform properly with due diligence of loans to be securitized. RBI has introduced STC securitization that is a special case of securitization, called, Simple, Transparent, and comparable with defined norms and preferential capital requirements. RBI has given time to market participants till June 30 to give comments and suggestions on the guidelines given by RBI.
All banks, financial institutions like NABARD, NHB, EXIM Bank, and SIDBI and, all non-banking financial companies including housing finance companies have to follow the guidelines. Two capital measurement approaches have been presented in RBI guidelines, such as Securitisation Standardised Approach (SEC-SA) and Securitisation External Ratings Based Approach (SEC-ERBA) in line with Basel III guidelines.
For residential mortgage-backed securities, RBI has retained the minimum holding period (MHP), which are issued by the special purpose entity, at six months or period covering six installments whichever is later. The minimum holding period is the duration for which a bank or NBFC is required to hold the loans on its book before selling them. A loan participation contract can be used to sell the standard assets either by risk participation or funded participation. Whereas an assignment basis or slump sale should be used to sell stressed loans.
Lenders can decide on their price discovery process. “Objective is to develop a strong and tough securitization market in India while incentivizing simpler securitization structures,” said Reserve Bank India.
