Securitisation of stressed assets: RBI floats paper on regulatory purview

Securitisation refers to a process that includes the pooling of loans and then selling them to a Special Purpose Entity which then issues securities backed by the loan pool

It is desirable that special purpose entities (SPEs) and resolution managers should be under the regulatory purview, the Reserve Bank of India (RBI) on Wednesday said in a discussion paper on framework for securitisation of stressed assets.

Securitisation refers to a process that includes the pooling of loans and selling them to an SPE, which then issues securities backed by the loan pool.

In the case of securitisation of stressed assets, the originator of non-performing assets (NPAs) sells them to an SPE, which in turn appoints an entity to manage the stressed assets. Investors who buy securitisation notes are paid based on recovery from the underlying assets.

The role played by resolution managers in securitisation of stressed assets is related to experience in working out of NPAs, efficacy of the business plan, recovery strategies and loan management among other factors, the RBI said.

While the RBI had in September 2021 issued a revised framework for securitisation of standard assets, at present there is no corresponding mechanism for securitisation of NPAs through the SPE route. Based on market feedback, the RBI decided to enable such a process.

“Under SSAF (securitisation of stressed asset framework), the role of SPEs and the resolution managers is of paramount importance because of their involvement with resolution/recovery exercise of the underlying exposures and reporting requirements to financial regulators,” the RBI said in the paper released on Wednesday.

In initial talks with select market participants, the views expressed were broadly in line with the global experience on the matter of choosing assets, with the focus on retail stressed assets such as mortgages, unsecured personal loans and loans taken by MSMEs.

“In these categories of loans, where the borrower base is diversified, the cash flows are relatively predictable even where the assets are stressed, and borrowers often continue to make regular payments,” the RBI said.

Another option being considered was to permit large stressed corporate accounts, but the downside to these was that the accounts could result in highly uncertain cash flows and delays in decision making, the RBI said.

“On the other hand, these assets have significant enterprise value backed by tangible security and potentially may attract a wider investor base. Moreover, since these accounts form a major part of NPAs of the financial sector, excluding them from SSAF will limit the universe of underlying pools,” the RBI said in the paper.

With regard to the question of access to funds for the resolution managers, amongst other options, the RBI’s paper suggested a pro-rata contribution by the resolution manager with regard to funds obtained from lending institutions other than the originator.

The discussion paper includes the question of whether the framework on securitisation of stressed assets should only be limited to NPAs or whether it should include standard assets too, up to a certain threshold. Responses to the question may draw upon pertinent implications with regard to regulatory arbitrage and impact on resolution strategy and effectiveness, the RBI said.

Such an approach would balance out the desirability of the resolution manager to have ‘skin-in-the-game’ as well without putting the onus solely on the Resolution Manager to finance expenses from own funds only, the paper said.

The central bank said that it was vital that Resolution Managers be independent entities from the originators of the loans.

“Having an independent RM under SSAF is perceived as a strong point for the investors compared to the case where the originator manages the assets via their specialized servicing unit. RMs who are independent from the originator can bring up-to-date recovery mechanisms and would be able to treat all portfolios in a similar manner,” the RBI said.