RBI Updates for NBFCs- A rerun of the regulatory changes introduced during FY 24-25
– Team Finserv (finserv@vinodkothari.com)
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Bond Credit Enhancement Framework: Competitive, rational, reasonable
Balancing between Bling & Business: RBI proposes new Gold Lending rules
Unified framework for Non-fund based facilities, by banks and NBFCs
Access the Youtube video at https://www.youtube.com/watch?v=QhCARmuzksM
-Vinod Kothari (vinod@vinodkothari.com)
The RBI’s proposed framework for partial credit enhancement for bonds has significant improvements over the last 2015 version
The RBI released the draft of a new comprehensive framework for non-fund based support, including guarantees, co-acceptances, as well as partial credit enhancement (PCE) for bonds. The PCE framework is proposed to be significantly revamped, over its earlier 2015 version.
Note that PCE for corporate bonds was mentioned in the FM’s Budget 20251, specifically indicating the setting up of a PCE facility under the National Bank for Financing of Infrastructural Development (NaBFID).
A quick snapshot of how PCE works and who all can benefit is illustrated below:
The highlights of the changes under the new PCE framework are:
Partial Credit Enhancement (PCE) is a risk-mitigating financial tool where a third party provides limited financial backing to improve the creditworthiness of a debt instrument. Provision of wrap or credit support for bonds is quite a common practice globally.
PCE is a contingent liquidity facility – it allows the bond issuer to draw upon the PCE provider to service the bond. For example, if a coupon payment of a bond is due and the issuer has difficulty in servicing the same, the issuer may tap the PCE facility and do the servicing. The amount so tapped becomes the liability of the issuer to the PCE provider, of course, subordinated to the bondholders. In this sense, the PCE facility is a contingent line of credit.
A situation of inability may arise at the time of eventual redemption of the bonds too – at that stage as well, the issuer may draw upon the PCE facility.
Since the credit support is partial and not total, the maximum claim of the bond issuer against the PCE provider is limited to the extent of guarantee – if there is a 20% guarantee, only 20% of the bond size may be drawn by the issuer. If the facility is revolving in nature, this 20% may refer to the maximum amount tapped at any point of time.
Given that bond defaults are quite often triggered by timing and not the eventual failure of the bond issuer, a PCE facility provides a great avenue for avoiding default and consequential downgrade. PCE provides a liquidity window, allowing the issuer to arrange liquidity in the meantime.
PCE under the earlier framework could have been given by banks. The ambit of guarantee providers has been expanded to include SCBs, AIFIs, NBFCs in Top, Upper and Middle Layers and HFCs. However, in case of NBFCs and HFCs, there are additional conditions as well as limit restrictions.
As may be known, entities such as NABFID have been tasked with promoting bond markets by giving credit support.
The PCE can be extended against bonds issued by corporates /special purpose vehicles (SPVs) for funding all types of projects and to bonds issued by Non-deposit taking NBFCs with asset size of ₹1,000 crore and above registered with RBI (including HFCs).
PCE shall be provided in the form of an irrevocable contingent line of credit (LOC) which will be drawn in case of shortfall in cash flows for servicing the bonds and thereby may improve the credit rating of the bond issue. The contingent facility may, at the discretion of the PCE providing RE, be made available as a revolving facility. Further, PCE cannot be provided by way of guarantee.
What is the difference between a guarantee and an LOC? If a guarantor is called upon to make payments for a beneficiary, the guarantor steps into the shoes of the creditor, and has the same claim against the beneficiary as the original creditor. For example, if a guarantor makes a payment for a bond issuer’s obligations, the guarantor will have the same rights as the bondholders (security, priority, etc). On the contrary, the LOC is simply a line of liquidity, and explicitly, the claims of the LOC provider are subordinated to the claims of the bondholders.
If the bond partly amortises, is the amount of the PCE proportionately reduced? This should not be so. In fact, the PCE facility continues till the amortisation of the bonds in full. It is quite natural to expect that the defaults by a bond issuer may be back-heavy. For example, if there is a 20% PCE, it may have to be used for making the last tranche of redemption of the bonds. Therefore, the liability of the PCE provider will come down only when the outstanding obligation of the bond issuer comes to less than the size of the PCE.
The existing PCE framework restricts a single entity to providing only 20% of the total 50% PCE limit for a bond issuance. It is now proposed that the sub-limit of 20% be removed, enabling single entity to provide upto 50% PCE support.
Further, the exposure of an RE by way of PCEs to bonds issued by an NBFC/ HFC shall be restricted to one percent of capital funds of the RE, within the extant single/ group borrower exposure limits.
Under the existing framework, only the entities providing PCE were restricted from investing in the bonds they had credit-enhanced. However, the new Draft Directions expand this restriction by prohibiting all REs from investing in bonds that have been credit-enhanced through a PCE, regardless of whether they are the PCE provider. The draft regulations state that the same is with an intent to promote REs enabling wider investor participation.
This is, in fact, a major point that may need the attention of the regulator. A universal bar on all REs from investing in bonds which are wrapped by a PCE is neither desirable, nor optimal. Most bond placements are done by REs, and REs may have to warehouse the bonds. In addition, the treasuries of many REs make opportunistic investments in bonds.
Take, for instance, bonds credit enhanced by NABFID. The whole purpose of NABFID is to permit bonds to be issued by infrastructure sector entities, by which banks who may have extended funding will get an exit. But the treasuries of the very same banks may want to invest in the bonds, once the bonds have the backing of NABFID support. There is no reason why, for the sake of wider participation, investment by regulated entities should be barred. This is particularly at the present stage of India’s bond markets, where the markets are not liquid and mature enough to attract retail participation.
Under the Draft Directions the capital is required to be maintained by the REs providing PCE based on the PCE amount based on applicable risk weight to the pre-enhanced rating of the bond. Under the earlier framework, the capital was computed so as to be equal to the difference between the capital required on bond before credit enhancement and the capital required on bond after credit enhancement. That is, the existing framework ensures that the PCE does not result into a capital release on a system-wide basis. This was not a logical provision, and we at VKC have made this point on various occasions2.
– Team Finserv | finserv@vinodkothari.com
The RBI on September 30, 2024, flagged several concerns in gold lending practices of financial entities. Further, there were separate guidelines for banks and NBFCs leading to regulatory arbitrage and operational ambiguity. On April 09, 2025, the RBI introduced the Reserve Bank of India (Lending Against Gold Collateral) Directions, 2025 (Draft Directions).
The Draft Directions intend to:
In this write-up, we highlight the major changes for lenders, and particularly for NBFCs (The same are subsequently elaborated in the article).
Read more →– Team Finserv (finserv@vinodkothari.com)
RBI has consolidated the regulatory framework for non-fund based facilities offered by various REs. The draft guidelines provide prudential requirements for non-fund based products being offered by Banks, NBFCs and AIFIs. This would also cover under its ambit guarantees extended by NBFCs, however restricting the exposure to just 5% of the total asset size. Non-fund based (NFB) facilities such as Guarantees, Letters of Credit, and Co-Acceptances are proposed to be governed under these guidelines.
Additionally, the Draft Directions also provide regulations for providing partial credit support by REs to the bond issuances, including capital against the PCE norms.
To understand the proposed provisions under the Draft Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025 (“Draft Directions”) dated April 9, 2025, the article is divided into two sections for ease of reference:
The Draft Directions consolidate multiple circulars for various REs into a single framework. The revised provisions are now proposed to be extended to all REs for their NFB credit exposures unless otherwise specified. Specifically, the Draft Directions is proposed to be made applicable to the following entities –
The Draft Directions clarify that any arrangement involving Default Loss Guarantee, also known as First Loss Default Guarantee (FLDG), whether between REs or with Lending Service Providers (LSPs) in case of digital lending, must follow the existing RBI guidelines on DLG.
Importantly, the presence of a DLG cover should not replace proper credit assessment. REs are insisted to maintain strong credit appraisal and underwriting standards, regardless of whether they are receiving or providing the guarantee. If an RE provides a DLG, it must evaluate the loans just as thoroughly as if they were part of its own portfolio. This would in a way extend the scope of REs acting as LSPs and sourcing loans for other REs.
Under the Draft Directions, all NBFCs, UCBs, RRBs, and RCBs are permitted to issue financial guarantees. However, performance guarantees are restricted to scheduled UCBs and NBFCs classified in the middle and upper layers. A performance guarantee is a commitment to pay a certain amount if the borrower fails to meet ‘non-financial obligations’ under a contract—for example, not completing a project on time or not delivering goods as agreed.
To manage risk, it is proposed that these REs cap their total outstanding guarantee exposure at 5% of their total assets based on the previous financial year’s balance sheet. Within this, unsecured guarantees must not exceed 25% of the total guarantee limit. For instance, if an RE has total assets of ₹10,000 crore, it can issue guarantees up to ₹500 crore, of which only ₹125 crore can be unsecured.
Further, the maximum tenor of any performance guarantee issued by these entities is capped at 10 years.
Our detailed write-up on Partial Credit Enhancement covers the concept, its applications, limitations, current regulatory framework, and existing gaps. The PCE framework, introduced by the RBI in 2015, was initially limited to scheduled commercial banks. However, the Draft Directions significantly expand its scope, now permitting AIFIs, NBFCs in the Top, Upper, and Middle Layers, and HFCs to provide PCEs for bonds issued by corporates or SPVs for financing various types of projects. It also allows PCEs for bonds issued by non-deposit taking NBFCs (including HFCs) with an asset size of ₹1,000 crore or more and registered with the RBI.
The primary objective of this move is to improve the credit rating of such bonds, enabling corporates to raise funds from the bond market on more favorable terms.
Under the existing framework, the bank providing PCE does not hold capital based only on its PCE amount. Instead, it calculates the capital based on the difference between:
The objective was to ensure that the PCE provider should absorb the risks that it covers in the entire transaction.
Under the Draft Directions the capital is required to be maintained by the REs providing PCE based on the PCE amount based on applicable risk weight to the pre-enhanced rating of the bond.
The Draft Directions lay down specific conditions for providing PCE to bonds issued by NBFCs and HFCs.
-Team Finserv (finserv@vinodkothari.com)
“Only the few know the sweetness of the twisted apples” – Sherwood Anderson
If securitisation of stressed assets abbreviates as SOSTRA, here is the new shastra (tool) for NPA clean-up from the financial system. On January 11, 2024, while speaking at the Centre for Advanced Financial Learning (CAFRAL)[1], then RBI Governor Shaktikanta Das announced that the RBI is in the process of formulating a framework for the securitisation of stressed assets based on the public comments received on the Discussion Paper on Securitisation of Stressed Assets Framework, released by the RBI on January, 2023.
Based on the comments received on the above mentioned discussion paper and as proposed in the Statement on Developmental and Regulatory Policies dated April 09, 2025, the RBI has now released a draft framework for securitisation of non-performing assets. This is a major improvisation over the draft originally released in January 2023.
Some of the highlights of the new Draft Directions are:
Team VKC notes: In the 2023 draft, team VKC submitted clause-wise comments to the RBI and also gave a presentation to the RBI’s team. Many of our recommendations have been accepted by the RBI.
In our view, the proposed draft Directions provide an effective solution to clean up the NPA clogs, particularly in case of retail loans.
The key highlights of the proposed framework are illustrated below:
At present, in India, there exists a framework for securitisation of standard assets only which are regulated through the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021’ (‘SSA Directions’), which deals with standard asset securitisation. Under the SSA Directions, the definition of standard assets does not include non-performing loans, i.e., only those assets with a delinquency up to 89 days, would qualify for securitisation under the SSA directions.
On the other hand, in case of stressed loans, the TLE framework has always been permissive. That is, stressed loans may be sold by way of bilateral transactions.
Now, the present draft directions, Reserve Bank of India (Securitisation of Stressed Assets) Directions, 2025 (‘Draft Directions’) has been issued to facilitate securitisation of assets with a delinquency of more than 89 days, i.e stressed loans. The RBI proposed to introduce a framework for the purpose of securitisation of stressed loans back in 2023. The RBI had published a discussion paper for public consultation titled Discussion Paper on Securitisation of Stressed Assets Framework, whereunder the paper discussed the mechanism of securitisation of stressed assets. Vide the Statement on Developmental and Regulatory Policies the RBI announced its intention to come out with a draft framework for Securitisation of Stressed Assets and accordingly the draft framework for public consultation towards the same has been published on 09 April 2025, with comment period upto 12th May, 2025.
| Basis | SOSTRA | Asset Reconstruction Companies | Special Situation Funds |
| Global context | Securitisation of NPLs happens all over the world; in some cases (home loans in particular), with State support. | Globally, AMCs were envisaged, normally with a sunset, to tide over a crisis. Essentially for resolving systemic generation of NPLs | For driving investments into stressed loans, essentially with a view to the underlying collateral; mostly with significant upside opportunities |
| Indian context | Securitisation is currently allowed for standard assets only; draft Directions now permit securitisation of NPLs, including, within a limit of 10%, stressed but standard assets | 27 ARCs exist; however, most of them focus on asset aggregation, IBC resolution etc. Relatively less active in retail loan space | Cumulative Data as at Dec 31, 2024: Commitments raised-2048 cr.; Funds Raised- 1531 cr; Investment made-1510 crComparatively less popular |
| Economic drivers | Unlocking the inherent value of NPLs, particularly those which are still giving regular cashflows. Pertinent in case of retail pools | Resolution abilities of the ARC, in particular, sec 8 and 13 of the SARFAESI Act, legal powers and IBC | Investment returns based on the underlying collateral |
| Minimum Ticket Size | For investment- min. ₹1 crore per investor (similar to SSA Directions) | No statutory ticket size, but given limited number of investors, mostly aligned with the deal size. | Min. Investment by an Investor Rs 10 crores. |
| Nature of the investment | Credit-enhanced, mostly rated investment in securitisation notes, backed by cashflows expected from the pool of securitised loans. Distributions happen on a waterfall mechanism | Investment in security receipts; no credit enhancements. Distributions happen as and when collections are done. | Pooled investment by investors into a fund, which in turn buys multiple stressed loans. Subordination structures currently not permitted. |
| Skin-in-game for the originator | No originator risk retention stipulated; however, tranching/ credit-enhancement call for originator risk retention. Maximum originator retention 20%. | No minimum originator retention; ARC investment minimum 15% of originator’s share, or 2.5% of total SRs, w.e.h. SRs are pari passu – hence, subordination is not common/permitted | Direction acquisition of NPLs by the fund does not seem possible under the structure, except under Clause 58 of TLE Directions (resolution plans or JLF decision) |
| Potential Investors | Any investor, except related parties of the borrower or persons disqualified in terms of Section 29A of the IBC. | AIFs, FPIs, ARCs, all NBFCs (28th Feb 2025 notification), Banks (QBs) | HNIs and well-informed, sophisticated investors |
| Diversification of pool | Securitisation requires pool diversification – Herfindahl Index to be within 0.3. Single loan or chunky loans cannot be securitised | Single loan or chunky loans may be securitised | Will mostly be applicable in case of corporate loans undergoing JLF/IBC mechanism |
| Types of assets that can be acquired | NPAs- must be min. 90% Up to 10% can be stressed loans with 1 to 89 DPDFraud/red-flagged/wilful default accounts cannot be securitized. | All stressed loans which are in default for 1 DPD or more, NPAs,SRs of other ARCs, Fraud/wilful default accounts allowed (with conditions) | Stressed loans under clause 58 of TLE Directions, SRs of ARCs,Securities of distressed companies |
| MHP required on stressed assets | None | None in case of transfer to ARC | None in case of transfer to SSF;Further 6 month MHP is applicable on SSF |
| Enforcement of security interest under the SARFAESI Act | Possible to retain originator’s privity with the borrower; hence, originator’s original powers (if any) may continue. | Enforcement under SARFAESI – sec 13 Special powers under sec. 9In case original loan did not have the power, the power of the assignee is questioned in court rulings | Recommendation has been made by SEBI to RBI to include SSFs under the definition of ‘Secured Creditor’ under SARFAESI |
| Stamp Duty implications | Stamp duty as per Indian Stamp Act, 1899 | No stamp duty (8F of the Indian Stamp Act, 1899) | Stamp duty as per Indian Stamp Act, 1899, till any specific exemption is granted similar to ARCs |
| Tax Treatment | Income-tax Act section 115TCA currently does not cover this mode, as it refers to standard assets only.Listed PTCs may be the option. | Pass through treatment u/s 115TCA of the Income Tax Act 1961 | SSF exempted under Section 10(23FBA) Income is taxable directly in the hands of the investors under Section 115UB |
| Due Diligence | RBI-regulated lenders making investment shall do DD. | ARC do DD of the stressed assets. | Initial and continuous DD of it’s Investors- as applicable on ARCs |
Eligible Lenders who were eligible to securitise under the Securitisation of Standards Asset Master Directions (SSA Directions) are also the permissible/eligible lenders who can securitise their stressed asset under these Draft Directions. Hence accordingly the lenders who can securitise their stressed loans shall mean:
Stressed Loans under the Draft Directions will include loans having a DPD status of more than 0 days. It should be mentioned here that under the current SSA Directions, loans having a DPD status of upto 89 days can be securitised. Thus, the current draft directions will cover both, i.e.,
However, certain conditions are required to be met for the securitisation of a pool of assets under the Draft Directions:
a. The sum of the outstanding exposures in the underlying pool classified as NPA is equal to or higher than 90% of the total outstanding amount
Here, it may be mentioned that our recommendation made to RBI in February 2023, we discussed including standard assets as a part of the stressed loan pool. Our submission was that considering that regulatory frameworks world over do not restrict the inclusion of standard assets and therefore the composition of the pool should be left for the market forces to determine.
b. Sum of squares of relative shares of underlying stressed loans is 0.30 or less calculated as follows:
Let us illustrate the same with an example:
| Outstanding Balance of each loan (L) | L/B | (L/B)^2 = S | ||
| L1 | 100 | L1/B | 0.1063829787 | 0.01131733816 |
| L2 | 120 | L2/B | 0.1276595745 | 0.01629696695 |
| L3 | 130 | L3/B | 0.1382978723 | 0.01912630149 |
| L4 | 150 | L4/B | 0.1595744681 | 0.02546401086 |
| L5 | 110 | L5/B | 0.1170212766 | 0.01369397918 |
| L6 | 90 | L6/B | 0.09574468085 | 0.009167043911 |
| L7 | 80 | L7/B | 0.08510638298 | 0.007243096424 |
| L8 | 160 | L8/B | 0.170212766 | 0.02897238569 |
| Total outstanding balance of the portfolio (B) | 940 | Sum of S | 0.1312811227 | |
This approach has been mandated to prevent a single loan from comprising a significant portion of the pool. Given that these are stressed loans, ensuring diversification and avoiding concentration of any one loan is particularly important.
Similar to the present SSA Directions, the Draft Directions for securitisation of stressed loans also contain a list of assets that cannot be securitised. These include,
It may also be noted that under the Draft Directions, where standard assets form part of the pool (up to a maximum of 90% of the total outstanding amount), it must be ensured that such standard loan assets do not fall under the negative list prescribed under the SSA Directions.
The Draft Directions prescribe that the underlying loans must be homogenous. In this regard, the Draft Directions provide that loan exposures from the following two categories of loans should not be mixed as a part of the same pool:
The Draft Directions do not prescribe any MHP requirements, aligning with their objective of facilitating the securitisation of NPAs. Since assets must be held for a certain period to be classified as NPAs, the intent behind MHP is inherently met.
While the framework allows up to 10% of the pool to consist of stressed assets not yet classified as NPAs, we believe MHP should not apply to these either.
Under the Draft Directions, unlike the SSA Directions, maintaining a MRR is not a mandatory requirement. In our representation submitted to RBI, we discussed how imposing a MRR requirement might be unnecessary. We submitted that, under the SSA Directions, MRR is intended to ensure that the originator maintains a continuing stake in the securitised pool, thereby discouraging an originate-to-sell model that could lead to weak origination or underwriting standards.
However, in the context of NPAs, the originator has already demonstrated a continuing stake in the assets, and the objective of securitisation is now to offload these stressed exposures from its books. This changes the risk dynamics, making a mandatory MRR less relevant in such cases.
It may however be noted that paragraph 8 of the Draft Directions provides that the originator, the relationship manager (ReM), or both may retain a portion of the risk, in accordance with the terms of the contractual arrangement between them. Notably, where the originator is also appointed by the Special Purpose Vehicle (SPV) to act as the ReM for the purposes of resolution and recovery, a retention requirement is triggered.
Like the SSA Directions the Draft Directions provide a maximum retention of 20% by the originator, however interestingly one stipulation that has been introduced under the Draft Directions requires that any exposure above 10% upto 20% should be recognized as a first loss piece for all prudential purposes.
The Draft Directions has referred to the present SSA Directions for provisions around providing of credit enhancement facilities, liquidity facilities, underwriting facilities and servicing facilities to securitisation of stressed assets.
The Draft Directions also discuss that a ReM may be appointed who shall be responsible for administering the resolution/recovery of the underlying stressed exposures. Such ReM is required to have requisite expertise in the resolution of NPAs, including drawing of effective business plans, recovery strategies, and loan management.
It may be mentioned here that, the representation made to RBI in 2023 discussed how globally, a resolution manager is not a common feature in most NPA securitisation Structures and therefore, in this regard, the suggestion will be to provide for enabling provisions which will allow the market participants to appoint a resolution manager should there be a need to appoint one, depending on the characteristics of the underlying pool. Thus, our suggestion was to allow discretion with the market participants to appoint a RM.
| SSA framework | TLE framework | Proposed SOSTRA framework | |
| Loans not in default | Permitted | Permitted | Not permitted |
| DPD 1-89 days (Classified as Standard) | Permitted | Permitted | Permitted upto 10% of the pool size |
| DPD 1-89 days (Classified as NPA) | Not permitted | Permitted | Permitted |
| DPD > 90 days | Not permitted | Permitted | Permitted |
| Intent of the originator | Liquidity, capital relief etc | Liquidity, capital relief, off-balance sheet, concentration relief | NPA clean up |
| Intent of the investor | Yield | Inorganic book building | Yield |
| MRR | Required | Not required | Not required |
| MHP | Required | Required | Not required |
| Credit Enhancement | Can be provided | Cannot be provided | Can be provided |
| Liquidity Facility | Can be provided | Cannot be provided | Can be provided |
[1] Availabe at: https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1402
– Team Finserv | finserv@vinodkothari.com
RBI vide its Statement on Developmental and Regulatory Policies dated April 09, 2025, stated that in light of evolution of co-lending arrangements and lending practices, it was decided to expand the scope of co-lending and issue a generic framework for all forms of co-lending arrangements between Regulated Entities (‘RE’). Pursuant to the same, RBI has issued draft Reserve Bank of India (Co-Lending Arrangements) Directions, 2025. (‘Draft Directions’ or simply Directions).
The Draft Directions, once implemented, will override the 5th November, 2020 Guidelines (“Co-lending Guidelines”). Importantly, the discretionary co-lending or so-called CLM 2 goes away. The Draft Directions will also be a unified framework for all loan sourcing and servicing arrangements too.
This article analyses the key changes introduced and examines the impact of the same on REs.
A quick snapshot of the key changes have been illustrated below:
– Vinod Kothari, vinod@vinodkothari.com
The release of securitisation data by the rating agencies shows that securitisation volumes in FY 25 saw a 30% increase, taking the volumes to a new watermark of volumes reaching ₹ 2,68,000 crores.
Inherent in this growth a completely new feature – banks entering as securitisation issuers. Our analysis shows that there are at least 4 banks which have originated volumes of nearly ₹26,800 crores, led by HDFC Bank with issuances adding up to almost ₹21,400 crores. Obviously, the above data of originations by banks were entirely securitisation notes or PTCs, as we would not expect banks (with the exception of small finance banks) to have done transfer of loan exposures (TLE) or so-called DA transactions.
While banks are common issuers elsewhere in the world, banks have shunned securitisation issuance in the past and mostly remained limited to investing in securitisation notes and being on the buyside of loan transfer transactions.
At the start of FY 2024, a notable development in the securitisation market was observed with the entry of banks. While this was mostly dominated by Small Finance Banks, there were certain private sector banks in the space as well. Bank-originated volumes grew to about ₹10,000 crore in FY 2024, up from ₹6,600 crore in FY 2023. In our publication last year, Vikas Path: The Securitised Path to Financial Inclusion, we commented that banks are likely to be motivated to enter securitisation markets in a big way in FY 2025. Relevant extract of the same is as follows:
“Going forward, will there be pressure on banks to use securitisation for refinancing themselves?
There are several factors that need to be evaluated in this context:
These factors may motivate banks to enter securitisation markets in FY 2025.”
Further, in Jan 2025, our write up Secure with Securitisation: Global Volumes Expected to Rise in 2025 discussed how the securitisation volumes surged about 27% on-year-on-year to ₹ 1.78 lakh crore in the first nine months of FY 24-25, supported by large issuances from private sector banks. In the third quarter alone, issuances touched ₹ 63,000 crore with private sector banks contributing to 28% of this (HDFC bank alone securitised new car loans by issuing PTCs valued at just over ₹12,700 crore). However, originations by NBFCs were only up by 5%. The market also saw 15 first time NBFC issuers, bringing the total number of originators to 152, compared with 136 in the last financial year.
Our write up Indian securitisation enters a new phase: Banks originate with a bang also discussed how banks are now re-entering the market as originators. Earlier, after the GFC, banks shifted from being originators to becoming investors in securitised assets. This was however a stark contrast to the situation elsewhere in the world, where the issuances are primarily done by banks.
The issuance in FY 2025 is merely the start of a new normal: banks are expected to be dominant players in time to come. Capital relief as a motivation may have a strong appeal for banks, even though securitisation remains burdened with a lot of complicated rules.
Fig 1: Securitisation- A Cart loaded with regulations
The data discussed above does not include co-lending, which seems to be quite popular, though the recent stress in microfinance and personal lending seems to have slowed the co-lending vehicle. Even though non-PSL co-lending currently seems to be going with “write your own rule book”, the RBI has taken note of the same, as the 9th April 2025 announcements of the RBI include a new proposed framework of rules for non-PSL co–lending. Hence, the cart is not going to be an empty one in time to come.
Fig 2: An empty cart waiting to get the load of new rules
We have commented extensively earlier that transfer of loan exposures is not captured as a part of securitisation transactions internationally; however, in India, the so-called DA business has been an alternative to securitisation. Hence, Indian market data captures DA as a securitisation twin.
This year, like in the previous FY, securitisation notes or PTCs have taken nearly half of the last year’s volumes. Going forward, we expect more of securitisation notes, as bank issuances will naturally be focused on securitisation.
RMBS still remains a goal post. RMBS Development Company, formed with the agenda of promoting home loan securitisations, should soon be working to make an impact on the otherwise slow moving part of securitisation.
The otherwise dull and drab drawing board saw several structural innovations. There were time tranches, separation of liquidity and credit support, and even some interesting features such as two layers of cash collateral. Given the fact that the issuers of this year are strong and daring, their structures are obviously not dictated either by typecast investor templates, or by the placement agencies. Going forward, we see more structural innovations, in particular, IO strips being available for investors.
Personal finance and microfinance are already seeing rising default rates. Lenders are reportedly moving towards the so-called “secured lending”, where security may be more of a sense of being secured, than the value or realisability of the collateral. As global trade turmoil makes its wide-spread impact, there may be challenging times for financial sector entities, which may show on the performance of loan pools too.
Another very significant risk on which long term loan portfolios may be sitting is climate risk. Several India states face significant risk of climate-induced dislocation of population. The risk of extreme weather changes is also quite evident. These changes may impact long-term loan portfolios, and the build up of the impact may be faster than anyone expects.
In general, we all need to be prepared for major external correlation risks. These risks affect portfolios far more than loan level correlations do, and when they do, credit support levels quickly get eaten up.
Deadline Extended! Papers can be submitted by 12th May
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