The Reserve Bank of India on Wednesday released a discussion paper on Securitisation of Stressed Assets Framework (SSAF) and has invited comments from stakeholders.

The discussion paper broadly covers nine relevant areas of the framework including asset universe, asset eligibility, minimum risk retention, regulatory framework for special purpose entity and resolution manager, access to finance for resolution manager, capital treatment, due diligence, credit enhancement, and valuation.

"It draws upon similar frameworks introduced in other jurisdictions, while trying to keep it structurally aligned with the framework for securitisation of standard assets," RBI said in the release.

As per RBI, the comments may be submitted by February 28, 2023 to the Chief General Manager, Credit Risk Group, Department of Regulation, Central Office, Reserve Bank of India.

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In September, RBI had proposed in a statement on Developmental and Regulatory Policies, a discussion paper detailing relevant contours of the proposed framework.

Securitisation involves pooling of loans and selling them to a special purpose entity (SPE), which then issues securities backed by the loan pool.

"A well-developed securitisation market can inter alia provide a market-based mechanism for management of credit risk by financial institutions and can help in development of a secondary loan market.

The Bank in the Discussion Paper said that one of the key issues in SSAF relates to the universe of assets eligible to be covered under the framework. In terms of the extant instructions on SSA, eligible standard assets include those in the special mention account (SMA) category.

"Securitisation involving only NPAs may have uncertain cash flows, mainly dependent on recoveries from underlying assets and issuance of securitisation notes on those underlying assets may not have regular servicing, which may be a limiting factor for the universe of investors," it said.

Internationally, a limited window is permitted for inclusion of non-NPA (standard) assets for structuring purposes. Such transactions having combination of standard and NPA assets may lead to issues of regulatory arbitrage, complexity in valuation.

The requirement of Minimum Risk Retention (MRR), in case of SSAF, the objective of the originator is to transfer the NPAs from their books where they may no longer wish to be associated with the transferred assets in any way.

As these assets have already defaulted, the origination standards may have limited role in determining chances of recovery, and hence economic interests of originator may not always align with that of investors.

The Central bank further said that under SSAF, the role of Special Purpose Entity (SPEs) and the Resolution Manager (RM) is of paramount importance as they are directly responsible for resolution and recovery of underlying stressed pool. it is desirable that they should be within the regulatory purview of Reserve Bank.

"The resolution effort may require additional/interim finance to meet administrative, operational, and other expenses required to kick-off the resolution/recovery plans. RMs can either finance the same through funding raised from investors, borrowings from lending institutions, or a combination of the two," the release added.

It also said that due diligence is required for the investors to satisfy themselves regarding the quality of the underlying pool based on the loan-level information. With proper due diligence, the information asymmetry between the originator and potential investors is expected to be minimized.

"Due diligence requires to be closely related to recoverable value of the collateral/security and origination standards," the release added.

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