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
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).