The sale of season: Holding period requirements for assignments and securitisation

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– Team Finserv | finserv@vinodkothari.com

Any sale or assignment or transfer, including securitisation, of loans is subject to a minimum seasoning with the originator. Under the extant regulatory provisions, such requirement is referred to as ‘Minimum Holding Period’ (MHP), which means the minimum period for which the originator should have held the loan exposures before the same is transferred to the transferee or Special Purpose Entity (SPE), as the case may be. This serves several purposes: that the loan was not originated for sale, the originator has had some equity in the loans, and that there is a benefit of hindsight of performance.

MHP requirements have always been a part of the regulations in India. However, on December 5, 2022, the Reserve Bank of India (RBI) made certain amendments to the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021[1] (‘TLE Directions’) as well as the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021[2] (‘SSA Directions’). Among the other changes, there was a change in the MHP provisions; this change may have a significant impact on future transactions. 

This write-up intends to clarify the position with respect to the computation of MHP for different types of loans under TLE Directions as well as SSA Directions.

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RBI amends TLE Directions

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– Team Finserv | finserv@vinodkothari.com

The Reserve Bank of India (RBI) made certain amendments to the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’) on December 05, 2022. The long-awaited welcome move of allowing ARCs to acquire loans falling in 1-60 DPD as well is being well appreciated. Some of the changes seem to be creating a confusion; say not allowing foreign branches of Indian banks to acquire defaulted loans; while others, seem to be providing more clarity; such as clarifying that registration of security interest for the purpose of computing MHP shall mean registration of security interest with CERSAI only.

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Three significant changes in Securitisation Directions

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Loans with less than 1 year to go cannot be securitised; Minimum holding period norms tweaked, may impact home loan securitisation

– Vinod Kothari | finserv@vinodkothari.com

On December 5, 2022, the RBI silently made some significant changes and updated the RBI (Securitisation of Standard Assets) Directions, 2021 (‘SSA Directions’). It is difficult to understand if these amendments are pursuant to some consultation, or feedback gathered from supervisory experience. The three significant changes seem to be mutually disconnected, though some of the amendments are related to the amendments made, on the same date, to the RBI (Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’) too.

We deal with the three amendments, and their implications, below:

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Draft Master Direction on IT Governance, Risk, Controls and Assurance Practices

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An analysis of its impact on NBFCs

– Team Finserv, Vinod Kothari Consultants | finserv@vinodkothari.com

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Our recent write-ups on financial services: https://vinodkothari.com/category/financial-services/

Introduction of the Digital Rupee (e₹)

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RBI announces the launch of the first pilot

– Subhojit Shome, Senior Executive | finserv@vinodkothari.com

On 7th October, 2022 the RBI published a Concept Note[1] on Central Bank Digital Currency (CBDC) that intended to “create awareness about CBDCs in general and the planned features of the digital Rupee, in particular”. Chapter 8 (“Way Forward”) of the Concept Note provided for a phased approach towards implementation that involved building a prototype and running large scale pilots before actual launch of the ‘Digital Rupee’. The guiding principle being that the introduction of Digital Rupee should cause only a minimal or no disruption to the financial system.

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RBI introduces corporate governance norms for Asset Reconstruction Companies

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Timothy Lopes | Manager | finserv@vinodkothari.com

The RBI has, on October 11, 2022, issued a circular[1], amending the extant regulatory framework for Asset Reconstruction Companies (‘ARCs’) and introducing corporate governance norms and other aspects through this circular.

Considering the importance of ARCs, a need was felt to review the extant regulatory framework. Through the Statement on Developmental and Regulatory Policies released along with the Monetary Policy Statement on April 7, 2021, the RBI had set up a committee to “undertake a comprehensive review of the working of ARCs in the financial sector ecosystem and recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector.” The committee, constituted on April 19, 2021[2], had submitted its report to RBI and the same was placed on the website of RBI on November 02, 2021[3] and many recommendations have been implemented since. The circular comes pursuant to the recommendations of the said committee.

This circular is in addition to the extant regulatory framework governing ARCs and come into effect immediately or as otherwise indicated specifically therein.

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Group NBFCs’ assets to be aggregated for middle layer classification: RBI clarification

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– Aanchal Kaur Nagpal, Manager | aanchal@vinodkothari.com

RBI vide notification dated October 11, 2022, has clarified that the assets of NBFCs forming part of a group will be aggregated for determination of the “middle layer” status of NBFCs. This clarification dates back to the 1st of October and therefore, as on the effective date of the SBR framework, NBFCs which, on a consolidated basis, have assets of Rs 1000 crores or above, will have to start adhering to the  SBR framework as applicable to NBFC-ML.

Effective date

The Circular will be effective retrospectively from the date of applicability of the SBR Framework i.e. October 01, 2022.

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16 NBFCs identified as Upper Layer entities for bank-like compliances

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– Anita Baid, Vice-President, VKCPL | finserv@vinodkothari.com

In line with the guidance given in the Scale Based Regulatory Framework of the RBI[1], the new regulatory framework is effective from October 1, 2022. Just one day before D-day, the RBI on September 30, has kickstarted the new regulatory version for NBFCs by identifying 16 of the 9472 odd NBFCs[2], as NBFCs constituting the Upper Layer. These entities have been asked to migrate to a bank-like regulatory system. The first step upon this identification would be to put in place a Board approved policy for the adoption of the enhanced regulatory framework applicable to NBFC-UL. Further, these entities will prepare a glide path of compliance within three months, i.e. by December 30, 2022 and the glide path itself will have two years of adherence time, i.e. by September 30, 2024.

Our resources on the SBR Framework can be read here- https://vinodkothari.com/sbr/

In-house Training on SBR Framework for NBFC-ML/UL –
https://vinodkothari.com/2022/09/in-house-training-on-sbr-framework-for-nbfc-ml-ul/
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Stressed for reform: RBI proposes stressed assets securitisation and loss provisioning

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– Team Finserv (finserv@vinodkothari.com)

Rating agency Standard and Poor’s recently noted that at least 60 percent of the world’s economies are either into recession already or heading towards the same. The same report notes that 29 of the 33 countries covered by the study have disorderly inflation above the targets set by the respective central banks[1]. OECD’s interim report of September, 2022 says that despite a boost in activity as COVID-19 infections drop worldwide, global growth is projected to remain subdued in the second half of 2022, before slowing further in 2023 to an annual growth of just 2.2%. This is accompanied by inflationary pressures in most countries[2]. India is one of the two countries projected to have a growth rate of more than 6%.

The RBI’s monetary policy, September, 2022, as expected, has announced an interest rate hike of 50 bps in the policy rates.

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Structured Default Guarantees

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Analysing prevalent structures and their capital treatment

– Qasim Saif, Senior Manager | qasim@vinodkothari.com

The term that has been grabbing limelight in the world of finance, specifically for non-banking finance would be First Loss Default Guarantees (FLDGs). The growth of the fintech sector in India may be chiefly credited for making FLDGs as the latest buzzword. However, guarantees are not a new innovation; it has been commonly used in the finance sector since ages.

We are organising a Workshop on Emerging Regulatory Framework for NBFCs and digital lending on 19th, 20th and 21st September 2022. See details here – https://vinodkothari.com/2022/09/workshop-emerging-regulatory-framework-for-nbfcs/
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