Securitisation products to have minimum 1-year lock-in period

Written by fe Bureaus | New Delhi | Updated: Oct 28 2009, 05:55am hrs
The Reserve Bank of India (RBI) on Tuesday specified a minimum lock-in period of one year for securitisation products. It also asked the originators to retain a minimum 10% of the pool of assets being securitised.

These measures will ensure that banks or financial institutions actually hold on to underlying assets for some time before securitising them, thus taking on the risk instead of trying to offload it immediately. FE first broke the news in September 10 reportGovt to tighten securitisation norms.

Securitisation is a process through which a bank or financial institution creates a new financial product by combining receivables such as home loans, project receivables or even credit card payments.

The repackaged instruments are then sold to investors. In India, securitisation is largely based on a trust structure wherein underlying financial assets such as loans are transferred to a trustee company or a special purpose vehicle. That entity in turn issues pass-through certificates to investors, who can trade in those papers.

The announcement of securitisation guidelines is a good and conservative step for the pool of retail assets getting securitised. And what we hope is that the central bank gives some leeway for single tranche large corporate securitisation, as that helps the growth of capital markets, said Bank of America country treasurer Jayesh Mehta.

The Reserve Bank will issue detailed guidelines on the manner of computation of the one year lock-in period and other operational details keeping in view the international norms being developed, the RBI said in its mid-term review of the monetary policy.

The international work, especially in the European Union and the US regarding the minimum retention criteria, is still underway, it said.