The Reserve Bank of India (RBI) placed for public comments, its draft framework for Securitisation of Standard Assets in June 2020. This framework has several positive elements to it such as the removal of direct assignments from the definition of securitisation, the clarifications on single loan securitisation and on replenishing transaction structures, as well as the introduction of the Simple-Transparent-Comparable (STC) framework of Basel. In this note, Dvara Research provides a commentary on the overall framework as well as on certain specific aspects. In doing so, we do not strictly restrict ourselves to only the draft framework but also comment on its impact on the overall development of the securitisation market.
We discuss the need for a clear vision, rationale, and a roadmap to be placed by the RBI for how it sees the draft framework enable the development of this market. We also consider how RBI has made the choice between capital neutrality and capital relief through this framework and how the outcomes from such a choice can have an impact on how securitisation serves the efficient movement of risks within the banking system and also to investors outside the banking system. The use of mandatory listing as a policy tool may be warranted not just for Residential Mortgage Backed Securities (RMBS) but also for Asset-Backed Securities (ABS). But it must be put into place after solving for downstream issues in order to make such listing and reporting possible. Further, disclosures on listed PTCs must work for investors interested in participating in the secondary market and therefore more work remains to be done on streamlining listing and reporting processes. This needs concerted efforts to coordinate between not just RBI and SEBI but also with depositories and the Government of India. Another important issue that is beyond the RBI’s securitisation framework that needs to be addressed is the perceived differences in treatment of PTCs versus directly originated/purchased loan by banks, particularly public sector banks who may now be more likely to consider entering the securitisation markets as investors. Lastly, we suggest a way to allow for PTCs to be sold to retail investors provided that certain checks and balances are adhered to by market participants.
We conclude that RBI’s draft securitisation framework has many enabling features required for the growth and orderly development of the Indian securitisation market. However, resolving the challenges we point to are a prerequisite to gain the full momentum needed for the market to take off.
The detailed commentary can be found here.