RBI proposes market based mechanism for securitization of stressed assets

The Reserve Bank of India (RBI) on Wednesday released a draft framework for the securitisation of stressed assets, aiming to repackage these assets into tradable securities with varying risk profiles. This initiative seeks to create a market for stressed assets, attracting broad investor participation, to supplement the current practice where such assets are transferred to asset reconstruction companies under the SARFAESI Act.

 

“…it is proposed to enable securitisation of stressed assets through market-based mechanisms. This is in addition to the existing ARC route under the SARFAESI Act, 2002,” said Sanjay Malhotra, governor, Reserve Bank of India (RBI).

 

“…this might enable such investors to access the exposures which they otherwise are not able to. While complicated and opaque securitisation structures are undesirable from the point of view of financial stability, prudentially structured securitisation transactions can be important facilitators in recovery/resolution of stressed assets as they are likely to improve risk distribution and exit from such exposures for lenders,” the RBI said in the draft framework.

 

Currently, standard assets are securitised widely, where banks and non-banking finance companies (NBFCs) participate actively to acquire such assets.

 

According to the framework, lenders can sell stressed assets to special purpose entities (SPEs) only on a cash basis, as per a mutually determined price, and the sale consideration should be received not later than the transfer of the assets to the SPE. The loans can be taken out of the books of the transferor only on receipt of the entire sale consideration.

 

In addition, the securitisation of stressed assets may also involve a distinct class of facility providers – the resolution managers (ReMs) – responsible for administering resolution/recovery of the underlying stressed exposures.

 

“RBI has proposed that a new market-based framework for securitisation of stressed assets will be created, in addition to the existing ARC route under the SARFAESI Act, 2002. This will give more flexibility on managing NPA and will also lead to better realisation of haircut values etc,” an SBI research note said.

 

“The broad picture is, there will be different structures, more participants and more choice for investors and competition in attracting the best resolution framework. The distressed debt market in India will be maturing with more depth and liquidity – evolution towards development of a junk bond market,” said Hari Hara Mishra, CEO, Association of ARCs in India.