June 07, 2019

RBI published the RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019, which shall come into force with immediate effect. These directions encompass a framework for early recognition, reporting, and time bound resolution of stressed assets. The provisions of these directions shall apply to scheduled commercial banks (excluding regional rural banks), all India term financial institutions (NABARD, NHB, EXIM Bank, and SIDBI), small finance banks, and systemically important non-deposit taking non-banking financial companies, and deposit-taking non-banking financial companies.

  • The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

    • To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
    • To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
    • To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
    • To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

    The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

     

    Related Links

    Effective Date: June 18, 2019

    Press Release
  • Proposed Rule 1
  • Proposed Rule 2
  • Proposed Rule 3
  • Presentation on Regulatory Framework (PDF)
  • Presentation on Resolution Plan Rules (PDF)
  • The fundamental principles underlying the regulatory approach for resolution of stressed assets are as under:

    • Early recognition and reporting of default in respect of large borrowers by banks, financial institutions, and non-banking financial companies
    • Complete discretion to lenders about design and implementation of resolution plans, in suppression of earlier resolution schemes, subject to the specified timeline and independent credit evaluation
    • A system of disincentives in the form of additional provisioning for delay in implementation of resolution plan or initiation of insolvency proceedings
    • Withdrawal of asset classification dispensations on restructuring. Future upgrades to be contingent on a meaningful demonstration of satisfactory performance for a reasonable period
    • For restructuring, the definition of "financial difficulty" to be aligned with the BCBS guidelines
    • Signing of inter-creditor agreement by all lenders to be mandatory, which will provide for a majority decision making criteria

    RBI will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults so that the momentum toward effective resolution remains uncompromised. It is expected that the current circular will sustain the improvements in credit culture that have been ushered in by the efforts of the government and RBI so far and that it will go a long way in promoting a strong and resilient financial system in India.

     

    Effective Date: June 07, 2019

    Keywords: Asia Pacific, India, Banking, Prudential Framework, Resolution of Stressed Assets, Reporting, NBFC, Resolution Planning, RBI

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