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Changes In RBI Guidelines For Securitisation of Loans

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There was a requirement of changes in norms to decrease the defaults given by the banks. So, RBI released the guidelines for securitisation of loans on 7 May 2012. These guidelines are more or less similar to the draft presented in September 2011. These will help in more safer securitization as explained below.

The major concerns which are expected to result in a positive direction are Minimum Holding Period (MHP) and Minimum Retention Requirement (MRR). MHP will help the banks to keep the hold on securitisation of loans. The time period of holding is for the complete analysis of the security. So, the risk is not passed on to the investors and the first payment default risk will not be exist by this step. MRR allows to hold between 5% – 10% of the issuance to ensure the loan originators part in the investment.

Also, RBI has first time given the separate guidelines for the Direct Assignment Investments. The credit increment is not possible in this type of investment now. Banks will be highly effected as it forms a major part of the banks investments. The less flexible nature made this investment unattractive. The impossibility of credit enhancement gives rise to the open ended credit risk for the acquiring bank on the originator’s portfolio in case of bilateral assignment transactions.

securitisation of loans

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MHP Requirement for Securitisation and Direct Assignment by banks

Repayment Frequency
Type of Loan Weekly Fortnightly Monthly Quarterly More than quarterly
Original Maturity of less than 2 years

12

6

3

2

2

Original Maturity of 2-5 years

18

9

6

3

2

Original Maturity of more than 5 years

12

4

2

Apart from there are changes in Priority Sector Lending (PSL) also. According to the new guidelines, NBFC is now not under PSL. Now the preference to meet limits of PSL is to be designed differently. The guidelines have the negative impact on NBFCs as there is expected a dip in the off book funding. So, depending upon your type of investment, you can either be beneficial or not so effected much bothered about the new guidelines. Whereas the guidelines for direct assignments will result in some major changes. Based on the changes you will soon get the new ratings by the credit rating institutions.

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