Securitisation : CAIIB Retail banking (Module D),Unit 2

Securitisation: CAIIB Retail banking (Module D),Unit 2

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So, here we are providing “Unit 2: Securitisation of “Module D: Other Issue Related to Retail Banking” from “Optional Paper: Retail Banking”.

The Article is CAIIB Unit 2: Securitisation

Securitisation

Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgage, commercial mortgages, auto loans or credit card debt obligation (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which may be described as Bonds, Pass-through Certificates, or Collateralized Debt Obligations (CDOs).

Securitisation of Assets

Definition of some of the terminologies used in securitisation

  • Obligor: means a person who is liable, whether under a contract or otherwise, to pay a debt or receivables in discharge any obligation in respect of a debt or receivables.
  • Originator: refers to a bank that transfers from its balance sheet a single asset or a pool of assets to an SPV as a part of a securitisation transaction and would include other entities of the consolidated group to which the bank belongs.
  • Securitisation: means a process by which a single performing asset or a pool of performing assets are sold to a bankruptcy remote SPV and transferred from the balance sheet of the originator to the SPV in return for an immediate payment.
  • Special Purpose Vehicle (SPV): means any company, trust, or other entity constituted or established for a specific purpose – (a) activities of which are limited to those for accomplishing the purpose of the company, trust or other entity as the case may be; and (b) which is structured in a manner intended to isolate the corporation, trust or entity as the case may be, from the credit risk of an originator to make it bankruptcy remote.
  • Sponsor: means any person who establishes or promotes a special purpose distinct entity.

Securitisation by transfer of assets through securitisation

Assets Eligible for Securitisation

In a single securitisation transaction, the underlying assets should represent the debt obligations of a homogeneous pool of obligors. Subject to this condition, all on-balance sheet standard assets, except the following, will be eligible for securitisation by the originators:

  • Revolving credit facilities (e.g., Cash Credit accounts, Credit Card receivables, etc.)
  • Assets purchased from other entities
  • Securitisation exposures (e.g., Mortgage-backed/asset-backed securities)
  • Loans with bullet repayment of both principal and interest*

Minimum Holding Period (MHP)

Originating banks can securitise loans only after these have been held by them for a minimum period in their books. The criteria governing the determination of MHP for assets listed below reflect the need to ensure that:

  • The project implementation risk is not passed on to the investors, and
  • A minimum recovery performance is demonstrated prior to securitisation to ensure better underwriting standards.

Minimum Retention Requirement (MRR)

The MRR is primarily designed to ensure that the originating banks have a continuing stake in the performance of securitised assets so as to ensure that they carry out proper due diligence of loans to be securitized. The guidelines stipulate MRR of 5% of the book value of the loans being securitized for Loans with an original maturity of 24 months or less and 10% of the book value of the loans being securitized for Loans with an original maturity of more than 24 months. For Bullet repayment loans! receivables, 10% of the book value of the loans being securitized.

Minimum Retention Requirement (MRR)

Type of asset MRR
Assets with original maturity of 24 months or less Retention of right to receive 5% of the cash flows from the assets transferred on pari-passu basis.
Assets with original maturity of above 24 months Retention of right to receive 10% of the cash flows from the assets transferred on pari-passu basis.
Assets with bullet repayment of both principal and interest

 

Accounting and Asset Classification of MRR

The asset classification and provisioning rules in respect of the exposure representing the MRR would be as under:

  • The originating bank may maintain a consolidated account of the amount representing MRR if the loans transferred are retail loans. In such a case, the consolidated amount receivable in amortisation of the MRR and its periodicity should be clearly established and the overdue status of the MRR should be determined with reference to repayment of such amount. Alternatively, the originating bank may continue to maintain borrower-wise accounts for the proportionate amounts retained in respect of those accounts. In such a case, the overdue status of the individual loan accounts should be determined with reference to repayment received in each account.
  • In the case of transfer of a pool of loans other than retail loans, the originator should maintain borrower-wise accounts for the proportionate amounts retained in respect of each loan. In such a case, the overdue status of the individual loan accounts should be determined with reference to repayment received in each account.
  • If the originating bank acts as a servicing agent of the assignee bank for the loans transferred, it would know the overdue status of loans transferred which should form the basis of classification of the entire MRR/individual loans representing MRR as NPA in the books of the originating bank, depending upon the method of accounting followed.

Securitisation of NPA

  • Sale of Stressed Assets by Banks
  • Acquisition of Stressed Financial Assets by ARCs
  • Issue of Security Receipts (SRs)

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