RBI unveils 'safer' loan securitisation norms

MUMBAI: The Reserve Bank of India laid out norms for safer securitisation of loans that can theoretically help banks lend more without having to resort to raising capital often. However, it remains to be seen whether the market will receive it well.

The central bank prescribed a minimum lock-in period for loans that could be bundled and sold off to investors, and minimum retention criteria, i.e., the portion of the loan that will still be on the books of banks to ensure that the loan originators have their skin in the game.

"Originators should retain a portion of each securitisation originated, as a mechanism to better align incentives and ensure more effective screening of loans,'' RBI said. "In addition, a minimum period of retention of loans prior to securitisation is also considered desirable, to give comfort to the investors regarding the due diligence exercised by the originators.''

RBI also capped the total exposure of the originator, mostly banks, at 20% of the total securitised portfolio to ensure that the risk is transferred to investors.

To ensure that the investors in such securitized transactions are protected the central bank has directed banks to hold these loans for a minimum period and study their performance before securitizing. Additionally the central bank has also capped the total exposure of banks to the loans securitised in at 20% of the total securitised instruments.

"The criteria governing determination of MHP for assets need to ensure that, the project implementation risk is not passed on to the investors and a minimum recovery performance is demonstrated prior to securitisation to ensure better underwriting standards,'' said RBI in its guidelines.