RBI to bring in market-based scheme for stressed asset securitisation

The Reserve Bank of India (RBI) has issued draft guidelines for securitisation of stressed assets through a market-based mechanism. "A prudentially structured securitisation transaction can be an enabler for resolution of stressed assets as it is expected to improve risk distribution and provide an exit route from such exposures for lenders," RBI said in its statement.

RBI issued a draft framework for securitisation of stressed assets to enable securitisation through a market-based mechanism in addition to the existing ARC route under the Sarfaesi Act, 2002, which is expected to lead to the development of a junk bond market in India.

The regulator has proposed to allow lenders to securitise stressed personal loans, MSME loans, and other loans, but has excluded farm credit, education loans, fraudulent accounts, and wilful defaults.


The securitisation will involve pooling these loans and selling them to a special-purpose entity (SPE), which will issue securitisation notes backed by the loan pool. Assets classified as non-performing assets (NPAs) will be assigned through these pools only on a cash basis, with discounts based on asset classification.

Capital requirements for securitisation notes issued under the new directions will be pegged to risk weights assigned by credit rating agencies, but capped at the actual securitisation exposure. Lenders need to obtain two external valuation reports before securitising the assets. Also, investors cannot be a related party of the originator.

The RBI had released a discussion paper on securitisation of stressed assets in January 2023 and has now issued draft norms after stakeholder feedback. The asset quality of banks has improved during FY25 up to December, with the overall gross non-performing assets ratio declining to 2.5% in December from 3% a year ago, according to RBI's Monetary Policy Report.