To develop the securitisation market in India, the Reserve Bank of India on Monday came out with draft guidelines, which amongst other things, attempts to align the regulatory framework with the Basel guidelines.
In financial parlance, securitisation involves transactions, where credit risk in assets are redistributed by repackaging them into tradeable securities with different risk profiles.
This process gives investors of various classes access to exposures which they, otherwise, will be unable to access directly.
However, securitisation structures are complicated and opaque.
Accordingly, the guidelines proposed that definition of securitisation has been modified to allow single asset securitisations.
"Securitisation of exposures purchased from other lenders has been allowed," the RBI said.
Besides, the draft guidelines proposed that only those transactions that result in multiple tranches of securities being issued reflecting different credit risks will be treated as securitisation transactions.
"In line with the Basel III guidelines, two capital measurement approaches have been proposed: Securitisation External Ratings Based Approach (SEC-ERBA) and Securitisation Standardised Approach (SEC-SA)," the apex bank said.
"Further, a special case of securitisation, called Simple, Transparent and Comparable (STC) securitisations, has been prescribed with clearly defined criteria and preferential capital treatment."
Similarly, a key change relates to differential treatment for Residential Mortgage Backed Securities (RMBS) compared to other securitisations in respect of prescriptions regarding minimum holding period (MHP), minimum retention requirements (MRR) and reset of credit enhancements.
Additionally, a quantitative test for significant transfer of credit risk has been prescribed for derecognition for the purpose of capital requirements, independent of the accounting derecognition.
( With inputs from IANS )