RBI Consults on Frameworks to Implement Basel Securitization Standard
RBI published the draft framework for securitization of standard assets and the draft comprehensive framework for sale of loan exposures. Through these revisions, the aim is to develop a strong and robust securitization market in India, while incentivizing simpler securitization structures. The revised guidelines attempt to align the regulatory framework with the Basel guidelines on securitization that have come into force effective January 01, 2018. The revisions also take into account the recommendations of the Committee on Development of Housing Finance Securitization Market in India and the Task Force on the Development of Secondary Market for Corporate Loans, which were set up by RBI in May 2019. Comments on draft frameworks and responses to discussion questions are requested to be submitted by June 30, 2020.
A key recommendation of both the Committee as well as the Task Force was to separate the regulatory guideline for direct assignment transactions from the securitization guideline and treat it as a sale of loan exposure. RBI examined this recommendation and considered the public response received, which led to the decision to (apart from reviewing the securitization guidelines) comprehensively revisit the guidelines for sale of loan exposures, including standard as well as stressed exposures. The comprehensive guidelines harmonize the extant guidelines on sale of loan exposures and make them consistent with the changed resolution paradigm in the form of the Insolvency and Bankruptcy Code, 2016 and the Prudential Framework for Resolution of Stressed Assets issued in circular dated June 07, 2019. The draft frameworks are applicable to scheduled commercial banks (excluding regional rural banks), all India financial institutions (NABARD, NHB, EXIM Bank, and SIDBI), and all non-banking financial companies, including the housing finance companies.
The salient features of the draft securitization guidelines, in comparison with the existing guidelines, are as follows:
- Only transactions that result in multiple tranches of securities being issued, reflecting different credit risks, will be treated as securitization transactions and accordingly covered under these guidelines.
- In line with the Basel III guidelines, two capital measurement approaches have been proposed: Securitization External Ratings Based Approach (SEC-ERBA) and Securitization Standardized Approach (SEC-SA).
- A special case of securitization, called simple, transparent, and comparable (STC) securitizations, has been prescribed with clearly defined criteria and preferential capital treatment.
- The definition of securitization has been modified to allow single asset securitizations. Securitization of exposures purchased from other lenders has been allowed.
- Carve outs have been provided for Residential Mortgage Backed Securities (RMBS) in prescriptions regarding minimum holding period, minimum retention requirement, and reset of credit enhancements.
- A quantitative test for significant transfer of credit risk has been prescribed for de-recognition for the purpose of capital requirements, independent of the accounting de-recognition
The salient features of the draft framework for sale of loan exposures, in comparison with the existing guidelines, are as follows:
- Sale of standard assets may be by an assignment, a novation, or a loan participation contract (either funded participation or risk participation) whereas the sale of stressed assets may be by an assignment or a novation.
- Direct assignment transactions shall be subsumed as a special case of these guidelines.
- Requirement of minimum retention requirement for sale of loans has been done away with.
- The price discovery process has been deregulated to be as per the lenders’ policy.
- Stressed assets may be sold to any entity that is permitted to take on loan exposures by its statutory or regulatory framework.
- Some of the existing conditions for sale of non-performing assets have been rationalized.
Comment Due Date: June 30, 2020
Keywords: Asia pacific, India, Banking, Securitization, Loan Exposures, Basel, Standardized Approach, Credit Risk, STC Securitization, SEC-ERBA, SEC-SA, Regulatory Capital, RBI
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
FIN-FSA Announces Availability of Workbooks for FINREP ReportingRelated Articles
ESAs Issue Multiple Regulatory Updates for Financial Sector Entities
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
EBA Finalizes Methodology for Stress Tests, Issues Other Updates
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
OSFI Sets Out Work Priorities and Reporting Updates for Banks
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
APRA Finalizes Changes to Capital Framework, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.
BIS Hub and Central Banks Conduct CBDC and DeFI Pilots
The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.
ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations
The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.
ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector
Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)
EC Adopts Final Rules Under CRR, BRRD, and Crowdfunding Regulation
The European Commission (EC) recently adopted regulations with respect to the calculation of own funds requirements for market risk, the prudential treatment of global systemically important institutions (G-SIIs)
