RBI Proposes Stressed Assets Securitisation Framework For Quicker Resolution

The Reserve Bank of India on Wednesday released a discussion paper on the securitisation of stressed assets framework as a way to improve the quality of the sale and resolution of such accounts.

The regulator’s proposal comes on the heels of an announcement it made in September 2022. In September 2019, a task force for the development of a secondary market for corporate loans suggested the creation of a similar framework for non-performing assets.

Currently, the sale of bad loans takes place under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, or Sarfesi Act, through the asset reconstruction companies licenced by the RBI.

The discussion paper proposes a special-purpose entity approach for the sale of bad loans under the securitisation framework. The SPE, in turn, appoints a servicing entity to manage the stressed assets, typically with a fee structure that incentivises them to maximise recoveries on the underlying loans.

Investors are paid based on the recovery from underlying assets, as per the waterfall mechanism, depending upon the seniority of the tranches.

As part of the discussion paper, the RBI has asked a certain set of questions and is seeking feedback from stakeholders.

The first thing the paper asks is whether assets eligible for sale to the special purpose entity should be limited to NPAs or if standard accounts can also be included, up to a certain threshold.

"Internationally, a limited window is permitted for the inclusion of non-NPA (standard) assets for structuring purposes. However, such transactions having a combination of standard and NPA assets may lead to issues of regulatory arbitrage, complexity in valuation, etc.," the discussion paper said.

The next issue tackled in the paper is the nature of assets that can be sold to the special-purpose entity. The RBI asks whether assets should be limited to small-value retail and small business loans or extended to corporate accounts, say, worth more than Rs 100 crore.

Among the other questions in the paper are the nature of the resolution manager and the financial incentives accorded to them. Should the relationship manager participate in the risk involved in the assets to have skin in the game? Should these managers come under the RBI’s purview of regulations? What could these structures be?

The paper also delves into discussions on the nature of capital allocation against securitisation notes issued by the special-purpose entity. It also introduces the concept of a non-refundable purchase price discount, which limits the returns the seller of bad loans gets after recoveries exceed the net asset value.

Comments are to be submitted by Feb. 28.