RBI to come out with norms for securitising stressed loans
RBI is set to release final guidelines for securitisation of stressed assets, potentially initiating a junk bond market in India.
In what could mark the beginning of a in India, the () is likely to soon release the final framework for securitisation of .The regulator is likely to allow lenders to securitise stressed personal loans, MSME loans and other loans, but excluding farm credit to individuals, fraudulent accounts and wilful defaults, people aware of the development said. The securitisation will involve pooling these loans and selling them to a (SPE), which will issue securities backed by the loan pool.
Assets classified as (NPAs) and special mention accounts () - SMA-1 and SMA-2 - are likely to be sold through these pools only on a cash basis, with discounts based on asset classification, the sources said.
"Lenders are likely to be allowed to bundle and sell certain types of loans through securitisation, including personal loans and loans to small businesses (micro-enterprises)," said one of the people cited above. "However, they cannot include certain assets in these bundles, such as loans to other lending institutions, refinance exposures of certain financial institutions, farm loans to individual farmers, fraudulent accounts, and accounts in wilful default," the person said.
The proposal is that loans will be sold on a cash basis. The discount applied to the sale will depend on the asset classification: 5% for SMAs, 25% for sub-standard assets, and 50% for doubtful and loss assets.
The release of final guidelines for the securitisation of stressed assets "will lead to more transactions in junk debt papers", a second person aware of the development said.
The guidelines will specify which types of loans can be included in the securitisation process.
Initially, there was a debate on whether only NPAs should be considered or if standard assets, classified as special mention accounts should also be included. Now, RBI is likely to allow along with NPA, SMA-1 and SMA-2 accounts, which are loans overdue by up to 90 days, to be part of the securitisation pool.
The framework will also detail how and resolution managers (RMs) will operate. SPEs will buy pooled loans and issue securities backed by these loans, while RMs will manage the cash flows from these assets, sources cited above said.
The RBI is expected to allow RMs to borrow up to 75% of their funding needs, provided these borrowings have a priority claim over the cash flows recovered from the loans as access to additional financing is crucial for operations.
The RBI issued a discussion paper on the matter in January last year and gathered feedback from various stakeholders. In September 2022, RBI governor Shaktikanta Das mentioned the need for a framework.
The asset quality of lenders has been improving over the past few years. Banks have seen the GNPA ratio fall to an 11-year low of 3.2% at the end of September 2023.
Source: Stocks-Markets-Economic Times
