Three significant changes in Securitisation Directions

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:

Effective date

The amendments are effective immediately.

Some of these amendments may affect transactions which are in pipeline or at various stages of implementation. For example, the minimum residual maturity of 1 year condition may affect several ongoing transactions. Same is true for linking the minimum holding period (MHP) condition to completion of disbursement.  To ensure that the amendments do not disrupt transactions where some effective steps have already been taken, such that reversing such transactions at this stage will entail huge cost or inconvenience, we are of the view that the amendments should not be unsettling transactions which are in the process of implementation.

Minimum residual maturity of 1 year for securitisable loans

Para 6 of the SSA Directions lists down the loans/facilities which cannot be securitised. The amendment has added a clase therein, the effect of which is to say that the loans or facilities which have a residual maturity of less than 1 year cannot be securitised. The relevant extract is reproduced below:

vi. Loans with residual maturity of less than 365 days;

This amendment affects at least the following transactions:

• Loans where the original maturity itself is upto 1 year. A whole lot of consumer loans, fintech loans, BNPL credit facilities etc are extended these days with an original maturity upto 1 year. All these loans will now be ineligible for securitisation.
• Loans with original maturity of 15 months or less: Given the MHP condition of 3 months, the residual maturity will be less than 12 months at the time of securitisation. Hence, even 15-month loans will be ineligible.
• Loans where the original maturity was more than 1 year, but with the rundown of the loan, the remaining maturity is now less than 1 year.

It is difficult to understand the rationale behind this amendment. In fact, the replenishing/revolving structure has been explicitly permitted, and has, in fact, been pursued by several originators. The whole purpose of replenishing structure is to use short term assets to create long term investments.

Particularly adversely affected by the amendment will be the Fintech lenders. Most of them lend short-term, and most of them look at securitisation as the potential avenue to raise capital market funding. In fact, the experience with short term consumer loans has been quite good, and in many ways, better than that with long term loans.

It may be noted that there is no similar exception in case of TLE Directions -that is, such loans, even with residual maturity of less than 12 months, may still be transferred to other financial entities.

Holding period in case of Home loans and property loans to run from completion of disbursement

Here is another amendment which would have adverse implications to securitisation of home loans and construction finance. One of the pain points for securitisation of home loans prior to the SSA Directions 2021 was residential home loans was that the MHP was 12 months (as the home loans were mostly for more than 5 years). However, effectively, the holding period was much longer, since the full disbursement of the loans takes as long as the construction period. In effect, from the date of the first disbursement till the actual securitisation, home lenders were holding the loans for a good 2 to 3 years.

One of the important recommendations of the Harshvardhan Committee was to promote home loan securitization, and therefore, reduce the MHP for home loans to 6 months. The September 2021 Directions removed the linkage of the MHP to the completion of the disbursement.

However, with the present amendments, we were exactly back to where we were, prior to the September 2021 Directions. The amendments provide that in case of residential or commercial real estate loans, the MHP will run from the latter of the completion of disbursement or registration of security interest with CERSAI.

The insertion reads as follows-

9. The originators of such exposures shall have satisfied the Minimum Holding period requirement as per Clause 39 of the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 including the proviso to the above Clause.

Provided that for commercial or residential real estate mortgages, MHP shall be counted from the date of full disbursement of the loan, or registration of security interest with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), whichever is later.

It seems that the regulator may have been concerned about the potential lender’s obligation to complete the disbursement, after the loans have been securitised. However, if the EMIs or interest payment on the partly disbursed loan has already begun, there is no reason why the lender cannot transfer the part of the loan which is already disbursed. Of course, TLE Directions clearly recognise a partial transfer of loans.

In case of real estate projects or construction finance, the disbursement is usually linked to the stages of construction. In cases of loans where the property is under development, CERSAI registration takes place in two stages (i) At the time of beginning of the loan, the security interest is created on the plot and the same is registered with CERSAI; thereafter, (ii) Once the construction is completed, and all disbursements done, security interest is created on the property and registered with CERSAI.

In our view, for the purpose of computing MHP, the date when full disbursement is completed would in any case be much after the first registration with CERSAI and hence, the same should be considered.

Minimum investment size per investor

This amendment, which is quite subdued and not easy to decipher, may actually open up avenues for small investors to invest in securitised notes by way of secondary market transactions. It has been clarified by way of an explanation to the existing provision:

28. The minimum ticket size for issuance of securitisation notes shall be Rs.1 crore.

Explanation: Ticket size, for the purpose of these directions, refers to the size of investment by a single investor.

It is notable that SSA Directions had stipulated a minimum ticket size of Rs 1 crore for investment in securitisation transactions. Retail interest in securitised notes was just picking up, and several intermediaries thought that this prescription of the RBI killed retail interest.

The amendment, which is apparently clarificatory (and therefore, retrospective), is that the reference to ticket size will be taken as referring to investment size. That is to say, the condition of the regulation may be taken as satisfied if the minimum investment put in by an investor, at the time of issuance, is Rs 1 crore.

For instance, there may be 100 securitisation notes of denomination of Rs 1 lac each, which are picked by an investor. The investor may, then, downsell the same to various investors.

In fact, this may also promote listing of securitised debt instruments, as SEBI is expecting a uniform denomination of Rs 1 lac per debt instrument.

Our resources on the topic:

• The sale of season: Holding period requirements for assignments and securitisation
• RBI amends TLE Directions
• FAQs on Securitisation of Standard Assets
• FAQs on Transfer of Loan Exposure
• Global Securitisation Markets in 2021: A Robust Year for Structured Finance
• After 15 years: New Securitisation regulatory framework takes effect
• One stop RBI norms on transfer of loan exposures