RBI issues draft norms on securitisation transactions

Source:BusinessLine Bureau:20 April,2010
Mumbai,
The Reserve Bank of India on Monday issued draft guidelines regarding the minimum holding period and minimum retention requirement for securitisation transactions. The aim behind the guidelines is to develop an orderly and healthy securitisation market, to ensure greater alignment of the interests of the originators and the investors, as also to encourage the development of the securitisation activity, said the RBI in its circular.

The circular says that originators should retain a portion of each securitisation originated, as a mechanism to better align incentives and ensure more effective screening of loans. In addition, the RBI has also recommended a minimum period of retention of loans prior to securitisation so as to give comfort to investors regarding the due diligence exercised by the originator. These were recommended by the RBI in its October 2009 Quarterly Review.
Minimum Holding Period
For loans of up to 24 months duration, in case of loans with periodic repayment schedules, the MHP would be nine months from a certain set of relevant dates, while in case of bullet repayment loans, the MHP is 12 months from the relevant dates.
These relevant dates are the date of full disbursement of loans for an activity or purpose; or date of acquisition of asset by borrower (i.e. car, residential house,); or date of completion of project; or date of first instalment of interest or principal or EMI; whichever is later.
For loans of more than 24 months, in case of loans with periodic repayment schedules, the MHP would be 12 months from the relevant dates.
In case of loans of more than 24 months with bullet repayment, securitisation would not be allowed, said the RBI guidelines.
The RBI guidelines also list certain assets where banks are not permitted to undertake securitisation activities or assume securitisation exposures.
These include re-securitised assets (e.g. collateralised debt obligations of asset backed securities, including, a CDO backed by residential mortgage-backed securities); synthetic securitisations (e.g. credit-linked notes or credit default swaps) and securitisation with revolving structures (e.g. (e.g. credit card receivables and cash credit facilities).