DBOD.NO.BP.1502 / 21.04.048/2004-05
4 April 2005
All Commercial Banks (excluding RRBs)
All India Term Lending and Refinancing Institutions
All Non Banking Financial Companies (including RNBCs)
Dear Sir,
Draft Guidelines on Securitisation
of Standard Assets
It has been decided to issue guidelines
for securitisation of standard assets to ensure healthy development of
the securitisation market. The guidelines on asset securitisation as applicable
to banks, financial institutions and non-banking financial companies are
furnished in the Annexure.
2. These guidelines are
being issued as a draft for feedback from all concerned. The draft will be open
for comments for a period of three weeks from the date of this letter. Comments
on the draft guidelines may be addressed to the undersigned at the address given
below. Comments can also be sent by email to bsivakumar@rbi.org.in
and pjthomas@rbi.org.in.
Yours faithfully,
Sd/-
(Anand Sinha)
Chief General Manager-in-Charge
Annexure
Draft Guidelines on Securitisation
of Standard Assets
1. The regulatory framework provided in the
guidelines covers securitisation of standard assets
2. For a transaction to be treated as securitisation,
it must follow a two-stage process. In the first stage there should be pooling
and transferring of assets to a bankruptcy remote vehicle (SPV) and in the
second stage repackaging and selling the security interests representing claims
on incoming cash flows from the pool of assets to the third party investors
should be effected.
3. For enabling the transferred
assets to be removed from the balance sheet of the seller in a securitisation
structure, the isolation of assets or ‘true sale’ from the seller or originator
to the SPV is an essential prerequisite. The criteria of true-sale have been
prescribed in Attachment 1 and are illustrative but not
exhaustive. In the event of transferred assets not meeting the true-sale
criteria the assets would be deemed to be an on-balance sheet asset of the seller
who would be required to comply with all applicable accounting and prudential
requirements in respect of those assets.
4. Arms length relationship between
the originator / seller and the SPV shall be maintained as defined in Attachment
1.
5. The SPV should meet the criteria
prescribed in Attachment 2 to enable originators to
avail the off balance sheet treatment for the assets transferred by them to
the SPV and also to enable the service providers and investors in the PTCs to
avail of the regulatory treatment prescribed under these guidelines for their
respective exposures in a securitisation structure,. In all cases of securitisation
the securities issued by the SPV should be independently rated by an external
credit rating agency and such ratings shall be updated at least every 6 months.
6. The regulatory norms for
capital adequacy, valuation, profit/loss on sale of assets, income recognition
and provisioning for originators and service providers like credit enhancers,
liquidity support providers as well as investors as also the accounting treatment
for securitisation transactions and disclosure norms are given in Attachment
3.
7. The originating bank shall
furnish a quarterly report to the Audit Sub-Committee of the Board as per format
prescribed in Attachment 4.
8. The reference to ‘bank’ in the guidelines
would include financial institutions and NBFCs.
Attachment 1
The criteria for "True Sale" of
assets by the originator
i. Transaction price for transfer of assets
from the banks (originator) to the SPV should be market based/arrived at in
a transparent manner and at an arm's length basis.
ii. The assets of the banks, after their transfer
to SPV, should stand completely isolated from themselves i.e., put
beyond their own as well as their creditors' reach, even in bankruptcy. The
SPVs and holders of beneficial interests in their assets should obtain the
unfettered right to pledge or exchange or otherwise dispose of the transferred
assets free of any restraining condition, and shall have no recourse to
the originator. The originator shall not enter into an agreement to repurchase
(except to the extent and for the purpose indicated at iii below).
iii. The banks should not maintain effective
control over the transferred assets through any agreement that entitles
or obligates the banks to repurchase or redeem them before their maturity.
Any agreement for repurchase or swapping of assets by the originator would
vitiate the true sale criteria. However, an option to repurchase fully
performing assets at the end of the securitisation scheme where residual value
of such assets has, in aggregate, fallen to less than 10% of the original
amount sold to the SPV ("clean up calls") could be retained by the banks and
would not be construed to constitute 'effective control'.
iv. Mere provision of certain services
(such as credit enhancement, underwriting, hedging, liquidity support, asset-servicing,
etc.) by the banks in a securitisation transaction would not detract from
the 'true sale' nature of the transaction, provided such service obligations
do not entail any residual credit risk on the assets securitized or any additional
liability for them beyond the contractual performance obligations in respect
of such services.
v. All risks and rewards in respect of
the assets transferred by banks should have been fully transferred
to SPV. In case there is any agreement entitling the originator to any surplus
income on the securitised assets the criteria of true sale would be deemed
to have been satisfied. Further, assumption of any risk relating to credit
enhancement/ liquidity facility as envisaged in these guidelines is permitted.
vi. An opinion from the solicitors of
the originating banks should be kept on record signifying that all rights
in the assets have been transferred to SPV and originator is not liable to
investors in any way with regard to these assets. RBI would expect the banks
acting as originators / service providers to maintain documentary evidence
on record that their legal advisors are satisfied that the terms of the scheme
protect them from any liability to the investors in the scheme, other than
liability for breach of express contractual obligations for e.g. credit enhancement/
liquidity facility.
vii. The SPV should have no formal recourse
to the originating banks for any loss except through the mechanism of credit
enhancement, if extended by the banks, for which a written agreement should
be entered into at the time of origination of securitisation.
viii. The PTCs issued by the SPV shall not have
any put or call options.
ix. The banks should not make any representation
or provide a warranty in respect of the principal and / or future performance
of the PTCs issued by SPV to investors as well as future credit worthiness
of the underlying assets.
x. The transfer of assets from originator must
not contravene the terms and conditions of any underlying agreement
governing the assets and all necessary consents (including from third parties,
where necessary) should have been obtained to make transfer fully effective.
xi. The originator should not be under any obligation
to repurchase any asset sold except where the obligation arises from a
breach of a representation or warranty, if any, given in respect of the nature
of the assets at the time of transfer. A notice to this effect should be given
to the SPV and the investors and they should have acknowledged the absence
of such obligation on the part of the banks concerned.
xii. The originator should not purchase the
PTC issued by the SPV, which are backed by its own assets sold. In case, however,
the SPV issues the PTCs in a multi-tranche, senior, mezzanine or subordinate
structure, the originator could purchase the senior-most tranche of
the securities issued by the SPV at market price, for investment purposes.
Such purchase should, however, not exceed 5% of the original amount of the
issue provided the senior-most tranche is at least "investment grade".
xiii. The originator and the SPV may enter into
currency / interest rate swap arrangements for hedging purposes provided
such transactions are entered into at market rates.
xiv. Any re-schedulement, restructuring or re-negotiation
of the terms of the agreement, effected after the transfer of assets to the
SPV, shall be done only with the express consent of the investors, providers
of credit enhancement and other service providers. The altered terms would
apply to the SPV and not to the originator.
xv. In case the originator also provides servicing
of assets after securitisation, under an agreement with the SPV, and the
payments / repayments from the borrowers are routed through him, it shall
be under no obligation to remit funds to the SPV/investors unless and until
these are received from the borrower.
Attachment 2
Criteria for SPV under Securitisation
Guidelines
The SPV should meet the following
criteria for originators to avail the off balance sheet treatment for the assets
transferred by the originators for complying with the prudential guidelines
on capital adequacy or for availing of regulatory treatment prescribed under
these guidelines for any exposure assumed in a securitisation structure by other
banks.
a. The originating banks transferring the assets
to the SPV should not hold substantial interest in the Trustee Company. The
term substantial interest for the purpose of these guidelines would mean holding
of a beneficial interest in the shares thereof the amount paid up on which
exceeds Rs. 5 lakh or 10% of the capital of the Trustee Company, whichever
is less. The originator may, however, have one member on the board of the
trustee company.
b. Any transaction between the originator and
the SPV should be strictly on arm’s length basis.
c. The trustee company should not resemble in
name or indicate any relationship with the originator of the assets in its
title or name.
d. The trustee company should only perform trusteeship
functions in relation to the SPV and no other functions or undertake any other
business.
e. SPV should be a non-discretionary trust and
the deed of Trust should lay down, in detail, the functions to be performed
by the trustee in relation to the assets placed in trust (SPV) and should
not provide for any discretion to the trustee as to the manner of disposal
and management or application of the trust property i.e. to say SPV should
hold on assets passively.
f. The PTCs issued by the SPV shall compulsorily
be rated by a rating agency registered with SEBI and such rating at any time
shall not be more than 6 months old. The credit rating should be publicly
available.
g. A copy of the registered trust deed and the
accounts and statement of affairs of the SPV should be made available to the
RBI, if required to do so.
h. The SPV should provide disclosures regarding
its constitution, ownership, capital structure, size of issue, terms of offer
including interest payments/yield on instruments, details of underlying asset
pool and its performance history, including details of the individual obligors,
information about originator, transaction structure, service arrangement,
credit enhancement details, risk factors etc.
i. The SPV should provide continuing disclosures
by way of a Disclosure Memorandum, signed and certified for correctness of
information contained therein jointly by the servicer and the Trustee, and
addressed to each PTC holder individually through registered post at periodic
intervals (maximum 6 months or more frequent). In case the PTC holders are
more than 100 in number then the memorandum may also be published in a national
financial daily newspaper. The contents of the memorandum would be as under:
i. Collection summary of previous collection
period.
ii. Asset pool behaviour - delinquencies, losses,
prepayment etc. with details.
iii. Drawals from credit enhancements.
iv.Distribution summary.
v. Current rating of the PTCs and any migration
of rating during the period.
vi. Any other material / information relevant
to the performance of the pool.
(i) The SPV should also provide
a disclaimer clause stating that the PTCs do not represent deposits liabilities
of the originator, servicer, SPV or the trustee, and that they are not insured.
The Trustee / originator / servicer / SPV does not guarantee the capital value
of PTCs or collectability of receivables pool.
Attachment 3
Regulatory norms for capital adequacy,
valuation, profit/loss on sale of assets, income recognition and provisioning
and accounting treatment for securitisation transactions and disclosure norms
1. Capital adequacy for the
originator
1.1 In case the assets
are transferred to the SPV from the originating banks in full compliance with
all the conditions of true sale given in Attachment 1, the transfer would be
treated as a 'true sale' and originator will not be required to maintain
any capital against the value of assets so transferred from the date
of such transfer. The effective date of such transfer should be expressly indicated
in the subsisting agreement. However, RBI may, in certain exceptional circumstances,
regard the assets removed from the balance sheet of a bank through securitisation,
as carrying some residual risk to the originator bank even where the scheme
meets the foregoing conditions and may still require regulatory capital thereagainst.
Such circumstances might include inadequate segregation of the pool of assets
from originator’s other assets, co-mingling of cash flows arising therefrom,
etc.
1.2 The originating
banks could also invest in PTCs backed by the assets originated by it provided
the securitised paper carries a minimum investment grade rating. However, the
aggregate investment in such securitised paper should not, at any time, exceed
10 per cent of its total investment in non-SLR securities or 5% of the original
amount of the issue whichever is lower. In case of multiple-tranche issue of
the PTCs, the investment should be confined only to the highest/ senior-most
tranche provided it has at least investment grade. Any investment in excess
of the above ceiling or in a subordinated / junior tranche (regardless of its
rating), shall be deducted from the Tier 1 capital of the investing bank.
2. Capital adequacy for Service
Providers
2.1 A bank could provide
a variety of services such as, underwriting, credit enhancement and liquidity
support for a proprietary or a third-party securitisation transaction. For the
capital adequacy of the service providers, these facilities would receive the
treatment as detailed below.
2.2 For credit
enhancers
2.2.1 A bank may provide credit
enhancement for the PTCs issued by the SPV to absorb losses of the SPV or investors
in the PTCs or other participants in a securitisation structure in the specified
contingencies. The credit enhancement could be structured in a variety of forms,
of which the more common are subordinated loans to the SPV, over-collateralisation
or spread accounts. The entity providing credit enhancement facilities
should ensure that the following conditions are fulfilled:
i. The purpose of the credit enhancement is
to mitigate the credit risk inherent in the financial assets and it should
be structured in a manner to keep it distinct from other facilities especially
the liquidity facility. The nature of the credit enhancement provided to
a transaction should be clearly specified in a written agreement at the
time of originating the transaction and disclosed in the offer document.
There should not be any recourse to the enhancer beyond the fixed contractual
obligations so specified. In particular the enhancer should not bear any
recurring expenses of the securitisation.
ii. The facility should be provided on an
'arm's length basis' and is subject to enhancer's normal credit approval
and review process. The facility should be provided on market terms and
conditions.
iii. The facility is limited to a specified
amount and duration.
iv. In case where the enhancer is the seller,
the credit enhancement facility must be documented in a way that clearly
separates it from any other facility provided by the seller.
v. Where any of the above conditions is not
satisfied the enhancer is required to hold capital against the full value
of all the securities issued by the SPV.
vi. Credit enhancement should be undertaken
only at the initiation of the scheme except in the event of a scheme having
subsequent tranches of assets being placed in to the SPV.
vii. The credit enhancement in the form of
guarantees will be treated as commitment and converted at 100% conversion
factor.
viii. The duration of the facility is limited
to the earlier of the dates on which:
- the underlying assets are redeemed;
- all claims connected
with the securities issued by the SPV are paid out; or
- the bank's obligations
are otherwise terminated.
2.2.2 Where any of the conditions
as stated above is not satisfied, the bank will be required to hold capital
against the full amount of the securitised assets as if they were held on its
balance sheet. Where all of these conditions are satisfied, the capital treatment
to be applied to credit enhancement facilities is as set out below.
(i) First Loss Facility
(a) A "first loss facility"
represents the first level of protection against loss to the investors, SPV
or others in a securitisation scheme. The seller of the assets often provides
this facility but a third party may also be involved. The providers of first
loss facilities bear substantial risks (i.e., some multiple of historic losses
or worst case losses estimated by simulation or other techniques) associated
with the assets held by the SPV or the PTCs issued there against.
(b) Where first loss credit enhancement
is provided then the credit enhancement should be reduced from the capital to
the full extent from the books of the provider whether it is originator or third
party.
(ii) Second
Loss Facility
(a) A "second loss
facility" represents credit enhancement that provides a second tier of
protection to the investors, SPV or others in a securitisation transaction against
potential losses.
(b) Depending
on the coverage provided by any first loss facility, a second loss facility might
carry a disproportionate share of risk to the scheme. In order to limit this possibility,
a credit enhancement facility will be deemed to be a second loss facility only
where:
- it enjoys protection from a substantial
first loss facility; and
(For this purpose, the
first-loss facility would be considered substantial where it covers
some multiple of historic losses or worst case losses estimated by
simulation or other techniques to the satisfaction of RBI)
- it can be drawn on
only after the first loss facility has been exhausted.
(c) Where second loss credit
enhancement is provided then the credit enhancement should be reduced from the
capital to the full extent from the books of the provider whether it is originator
or third party.
2.3 Capital adequacy for
liquidity support providers
2.3.1 Liquidity facilities
may be provided to help smoothen the timing differences faced
by the SPV between the receipt of cash flows from the underlying assets
and the payments to be made to investors in the securities it has issued. The
liquidity facility must not provide for bearing any of the recurring expenses
of securitisation.
2.3.2 Where a liquidity
facility fails to meet any of the following conditions, it will be regarded
as serving the economic purpose of a credit enhancement facility and, therefore,
be treated in the same manner as a credit enhancement for capital adequacy
purposes:
a. The facility should be provided on an arm’s
length basis and be subject to providers’ normal credit approval and review
processes. The facility must be on market terms and conditions and should
be superior to the interest of the investors.
b. The nature of facility provided to a SPV
should be clearly specified in a written agreement at the time of origination
of the securitisation transaction and disclosed in any offering document.
There must be no recourse to the provider beyond the fixed contractual obligation.
c. the facility is documented in a fashion
which clearly separates it from any other facility provided by the bank;
d. the documentation for the facility must
clearly define the circumstances under which the facility may or may not
be drawn on;
e. The facility should be limited to a specified
amount and duration the amount being limited to the amount that is likely
to be repaid fully from liquidation of underlying exposures and any better
provided credit enhancement.
f. The provider must not bear any of the recurring
expenses of securitisation.
g. The facility should not be capable of being
drawn for the purpose of credit enhancement.
h. The facility should be reduced or terminated
should a specified event relating to deterioration in the asset quality
occur.
i. Payment of fees or other income for the
facility should not be subordinated, subject to deferral or waiver.
j. Funding should be provided to SPV and not
directly to the investors.
k. Funding under liquidity facility shouldn’t
be used to cover losses of the SPV. In addition the facility must not cover
any losses incurred in the underlying pool of exposures prior to a draw
or be structured in a way that a draw down is certain.
l. Drawings under the facility, if not repaid
within 90 days, should be fully provided for.
m. Any drawdown under the facility cannot
be used to provide permanent revolving funding;
2.3.3. There must be substantial
credit enhancement in place. Should the quality of the securitised assets
deteriorate to a level where the level of credit enhancement is no longer sufficient,
the liquidity facility will be treated as a credit enhancement for capital adequacy
purposes.
2.3.4. The commitment to
provide liquidity facility, to the extent not drawn would be an off- balance
sheet item and attract 100% credit conversion factor as well as 100 % risk weight.
The extent to which the commitment becomes a funded facility would attract 100
% risk weight.
2.4 Guidelines for Service Providers
A service provider will normally
assume obligations such as collection from obligors, payment to the investors,
reporting on the performance of the pool etc., in an asset securitisation scheme.
These functions may continue to be performed by the professional organisations
having the desired skills. A regulated entity may act as a servicer for fees
for the SPV provided that:
i. There is formal written agreement in place
that specifies the services to be provided and standards of performance required
from the servicer. There should not be any recourse to the servicer beyond
the fixed contractual obligations specified in the agreement;
ii. The services are provided on an arm’s length
basis, on market terms and conditions;
iii. The Trustee to the PTC and/or investors
have the clear right to select an alternative party to provide the facility;
iv. The facility is documented separately from
any other facility provided by the bank or FI;
v. Its operational systems (including internal
control, information system and employee integrity) and infrastructural facilities
are adequate to meet its obligations as a servicer.
The servicer should be under no
obligation to remit funds to the SPV or investors until it has received funds
generated from the underlying assets. The service provider shall hold in trust,
on behalf of the investors, the cash flows arising from the underlying and should
avoid co-mingling of these cash flows with their own cash flows. Where the conditions
as above are not met the service providers may be deemed as providing liquidity
facility to the SPV or investors and treated in the same manner for capital
adequacy purpose.
3. Capital adequacy for investors
in the PTCs
The capital charge for credit and
market risk for banks and FIs investing in PTCs will be governed by the extant
RBI guidelines issued from time to time.
4. Valuation of PTCs
The PTCs issued by SPVs would be
in the nature of non-SLR securities, therefore the valuation, classification
and other norms applicable to non-SLR instruments prescribed by RBI from time
to time will be applicable to the investments in PTCs.
5. Exposure norms for investment
in the PTCs
The counterparty for the investor
in the PTCs would not be the SPV but the underlying assets in respect of which
the cash flows are expected from the obligors / borrowers. The investors should
accordingly monitor their exposure to the individual borrowers and the borrower
groups as per the credit exposure norms of RBI wherever the obligors in the
pool constitute 5% or more of the receivables in the pool or Rs.5 crore, whichever
is lower.
6. Income recognition and provisioning norms
for investors in the PTCs
As the PTCs are expected to be
limited-tenor, interest bearing debt instruments, the income on the PTCs may
normally be recognised on accrual basis. However, if the income (or even the
redemption amount) on PTCs remains in arrears for more than 90 days, any future
income should be recognised only on realisation and any unrealised income recognised
on accrual basis should also be reversed. In case of pendency of dues on the
PTCs, appropriate provisions for the diminution in value of the PTCs on account
of such overdues should also be made, as already envisaged in the extant RBI
norms for classification and valuation of investment by the banks.
7. For the originators - treatment
at the time of sale
a) On transfer of the assets to
the SPV, the book value of the loan asset, net of the provisions held, should
be reduced by the amount of consideration received from the SPV. If the resultant
is a positive value, it should be accounted for by debit to the Profit
& Loss account during the same accounting year in which the sale is effected.
b) In case, however, the resultant
is a negative value, it could be recognised during the same accounting
year by credit to the Profit & Loss account.
c) Where the consideration is received
partly in cash and partly in kind the treatment specified in paragraph 8 of
the Guidance note on Accounting for Securitisation of Assets issued by the ICAI
should be followed.
8. Accounting treatment of the securitisation
transactions
The accounting treatment of the
securitisation transactions in the books of originators, SPV and investors in
PTCs will be as per the guidance note issued by the ICAI with reference to those
aspects not specifically covered in these guidelines.
9. Public disclosures in respect of securitisation
transactions
The Originators should make the
following disclosures, as notes to accounts, presenting a comparative position
for two years:
a. Total number and book value
of loan assets securitised
b. Sale consideration received
for the securitised assets and gain / loss on sale on account of securitisation
c. Form and quantum (outstanding
value) of services provided by way of credit enhancement, liquidity support,
post-securitisation asset servicing, etc.
Attachment 4
Format of Quarterly Reporting to
the Audit Sub Committee of the Board by originating banks of the Securitisation
Transactions
1. Name of the originator:
2. Name and nature of SPV &
details of relationship with originator and service providers (including constitution
and shareholding pattern of SPV):
3. Description and nature of asset transferred:
4. Carrying cost of assets transferred
and % of such assets to total assets before transfer:
5. Method of transfer of assets:
6. Amount and nature of consideration received:
7. Objects of the securitisation offer:
8. Classification (as per RBI norms) of assets
transferred:
9. Amount and nature of credit
enhancement and other facilities provided by the originator (give details each
facility provided viz., nature, amount, duration, terms and conditions,):
10. Information regarding third
party service providers (e.g. credit enhancement, liquidity support, servicing
of assets, etc.) giving the details, facility-wise, viz. name & address
of the provider, amount, duration and terms and conditions of the facility.
11. CRAR of transferor: Before transfer
After transfer
Tier I
Tier II
12. Type and classes of securities
issued by SPV with ratings, if any, of each class of security, assigned by a
rating agency:
13. Name and address of holders
of 5% or more of securities (if available):
14. Investment by the originator
in the securitised paper, issuer wise:
Name of the issuer Class
of security No. of securities held Total amount
15. Details of hedging arrangements
(IRS/ FRAs), if any, giving amount /maturity date, name of counter parties,
etc.:
16. Brief description (including
diagrammatic representation of the structure) of the scheme denoting cash and
process flows):
17. Date and method of termination
of the scheme including mopping up of remaining assets: