Mortgage-backed securities: RBI proposes to relax its minimum holding norms

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June 9, 2020 7:45 AM

For residential mortgages, against which RMBS will be issued by the special purpose entity, the MHP applicable will be six months or period covering six instalments, whichever is later.

Securitisation of exposures purchased from other lenders has been allowed in the latest draft.

The Reserve Bank of India (RBI) on Monday released a draft framework for the securitisation of standard assets, proposing an easing of minimum holding requirements for mortgage-backed securities and a modification in the definition of the term ‘securitisation’ to apply it to single-asset transactions as well. Only transactions that result in multiple tranches of securities being issued reflecting different credit risks will be treated as securitisation transactions, and accordingly, covered under the guidelines, the central bank said.

“Aimed at development of a strong and robust securitisation market in India, while incentivising simpler securitisation structures, the revised guidelines attempt to align the regulatory framework with the Basel guidelines on securitisation that have come into force effective January 1, 2018,” the RBI said.  The revisions also take into account the recommendations of the committee on development of housing finance securitisation market in India, set up by the RBI in May 2019.

Securitisation of exposures purchased from other lenders has been allowed in the latest draft. One of the key changes 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. For residential mortgages, against which RMBS will be issued by the special purpose entity, the MHP applicable will be six months or period covering six instalments, whichever is later. The MRR on RMBS for the originator shall be 5% of the book value of the loans being securitised.

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. In line with Basel III guidelines, two capital measurement approaches have been proposed — securitisation external ratings based approach (SEC-ERBA) and securitisation standardised approach (SEC-SA). Further, a special case of securitisation — called simple, transparent and comparable (STC) securitisations — has been prescribed with clearly defined criteria and preferential capital treatment.

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