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SOSTRA: The New shastra of liquidating Non-performing loans
-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:
- Banks as well as NBFCs may securitise pool of NPAs;
- The pool shall consist entirely of stressed loans, but upto 10% of the pool may be assets which are standard (that is, more than 1 but upto 89 DPD). That is, originators may add a deal-sweetener. However, re-performing loans (that is, those that earned the tag of an NPA due to past default history, which is not completely washed out) may be securitised;
- To ensure that the pool does not have a significant concentricity, the Herfindahl Index of the loan pool should be within 0.3;
- The originator may optionally engage the services of a resolution manager fulfilling such eligibility criteria as mentioned under the Draft Directions;
- The originator may retain upto 20% exposure in the pool (that is, first loss piece, plus 10%, not exceeding 20% in total);
- Securitisation notes acquired by the buyer will get a standard status to begin with, but will be subject to valuation and provisioning requirements. The provisioning requirement is based on a linear amortisation of 20% each year, and aims at splitting the total provision to the tranches in the ratio of risk weights. Highest provisioning will be taken by the equity tranche, and lowest by the senior tranche.
- The SPV needs to ensure that the investors are not related parties of the borrower or disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016
- For the purpose of ticket size the Directions have referred to the SSA Directions hence the minimum ticket size for issuance of securitisation notes shall be Rs. 1 crore.
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:
Existing framework:
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.
Comparative Analysis – SOSTRA, ARC and SSFs
| 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
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:
- Scheduled Commercial Banks (except RRBs)
- All India Financial Institutions
- Small Finance Banks
- All NBFCs (Including HFCs)
Eligible Assets
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.,
- Loans having a DPD status of 1-89 days as well as
- Loans classified as Non performing assets
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:
- Calculate the outstanding balance of each loan
- Divided this figure by total outstanding balance of the portfolio on the origination cut-off date
- Square the figures obtained
- Calculate the total sum of these squares
- The resulting number should be equal to or less than 0.30.
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.
Assets that cannot be securitised
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,
- Re-securitisation exposures
- Exposures to other lending institutions
- Refinance exposures of AIFIs
- Farm Credit
- Education Loan
- Accounts identified as Fraud/Red Flagged Account, and
- Accounts identified as or being examined for ‘Wilful Default
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.
Homogeneity of the Pool
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:
- Personal loans and business loans to individuals; and Loans to Micro Enterprises, not exceeding ₹50 Crore and,
- All other Loans
Minimum Holding Period (MHP)
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.
Minimum and Maximum Risk Retention
- Minimum Retention Requirements
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.
- Maximum Retained Exposure
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.
Structure
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.
Resolution Manager
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.
Requirements relating to Resolution Manager
- Should not be a person disqualified under Section 29 A of IBC;
- Should not be a related party of the originator;
- Should not support losses of SPV except to the extent contractually agreed upon;
- Should remit all cashflows as per agreed terms;
- During interim period from cash collection to remitting to SPE, collections to be made in escrow account;
- ReM can raise additional finance for the purpose of resolution related activities of the pool to the extent of 75% of total requirement. However finance cannot be taken from originator
- ReM to adhere to guidelines of FPC issued by RBI
Comparison of SSA, TLE and Proposed SOSTRA Framework
| 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
Banks drive Securitisation volumes to all-time high
– 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.
The beginning of a new normal
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:
- First, the capital adequacy ratios for most banks are comfortable – the RBI’s Financial Stability Report for December 2023 states that the CAR for all scheduled commercial banks was at 16.8% as of Sept., 2023, though lower than the number as on March 23. However, risk weights were recently increased on consumer lending and exposure to NBFCs. Further, there is a proposal to increase provisioning in case of project loans. The proposal to introduce expected credit losses has been pending for some time. Once implemented, it will cause significant increase in loan loss allowance, putting pressure on capital adequacy.
- However, credit deposit ratio (CD ratio) has been increasing for most of the larger banks. This is due to sharp credit growth – there have already been several noises about the increasing levels of personal loans and consumer credit in the country
- As credit continues to grow, and deposit growth may be sluggish due to increasing popularity of alternative retail investment products, banks will be left with very little options but to fund their asset buildup by opting for securitisation. Banks are also likely to look at the on-balance sheet advantage of securitisation – that while it offers capital relief, it does not force assets to be moved off the balance sheet. In fact, most Indian transactions stay on the balance sheet. Therefore, there is liquidity, and yet no contraction on the balance sheet size.
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
Direct Assignments versus Securitisation
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.
Structural Innovations
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.
Headwinds in future?
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.
Related resources –
Call for papers – Wadia Ghandy Award for Structured Finance Research, 2025
Last day to apply extended till 25th April, 2025
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For more information regarding the 13th Securitisation Summit –
De-jargonizer: Understanding key terms in Securitisation structures
– Financial Services Division (finserv@vinodkothari.com)
Introduction
The RBI’s regulatory framework for securitisation, the SSA Directions use several terms used in securitisation structures, some of which are aligned with global practices, while some not. In addition, the marketplace uses some so-very-Desi expressions. As transactions have started coming off the mould, it is important to understand some of the key terms and structural considerations, to help bring more innovation and evolution in the structures.
While we have in the past developed a general securitisation glossary for our readers, the said resource pertains to terms as they are used globally. However, this article aims to demystify key-securitisation related terminologies, specific to the Indian SSA Directions, shedding light on their relevance and practical applications. This pertains to concepts such as securitisation notes (PTCs), credit enhancement (CE), liquidity support, first loss facilities, subordinated tranches, and over-collateralisation are critical in structuring securitisation deals, determining the level of risk borne by different participants, and ensuring compliance with regulatory frameworks like those set forth by the Reserve Bank of India (RBI) and Basel III norms.
Key Components of Securitisation Exposure
- Securitisation Notes (PTCs)
These are the securities issued in a securitisation transaction, representing an interest in the underlying asset pool. They are structured into different tranches based on risk and return characteristics.
- Credit Enhancement (CE)
Credit enhancement is a mechanism designed to improve the credit profile of securitisation notes. CE can be achieved through various means, including:
- Cash collateral
- Subordination
- Excess spread
- Other forms of financial support like guarantees, overcollateralisation, etc.
- Tranches in Securitisation (Tranched Cover)
- Senior Tranche: The highest-rated tranche with the lowest risk exposure.
- Mezzanine Tranche: An intermediate tranche, often referred to in market parlance when there are three tranches. To learn more about Mezzanine tranches, see our explainer, here.
- Junior Tranche: The lowest-rated tranche that absorbs losses first.
Class A, Class B, Class C, Class D etc. : Used when there are more than three tranches.
In respect of computation of risk weights (the table of risk weights as provided under SSA Master Directions) senior tranche actually means the senior most, and the rest of all tranches are said to be junior tranches.
- First Loss Facility
The first loss facility is the first layer of protection against losses in a securitisation transaction. It absorbs losses before any other tranche. However, seemingly it does not include excess spread, as excess spread is not provided by the originator or a third party [Reference drawn to para 5(h) of SSA Master Directions]
- Equity Tranche
Though not explicitly defined, the Basel III Framework [para 712(ii)] describes the equity tranche as the one that absorbs first losses. However, RBI Regulations distinguish between equity tranche and first loss facility. Based on corporate finance principles, the equity tranche is the most junior tranche, with the right to sweep residual returns. As per regulatory provisions, the equity tranche appears to be one level above the first loss facility if such differentiation exists within a structure.
- Over-Collateralisation
Over-collateralisation refers to the excess value of assets transferred over the funding raised by the originator. It can serve as credit enhancement if subordinated but is not counted as part of the first loss facility.
- Underwriting Facility
The underwriting referred to in para 56 of the SSA Master Directions is the same as securities underwriting. In a securities underwriting arrangement, the underwriter is expected to acquire the securities and sell them in the market. The underwriter usually guarantees a certain extent of subscription, in case there is any shortfall, the underwriter takes up the shortfall itself.
Third party or the originator may act as underwriters to the issue of securitisation notes upon coming with specified conditions of this clause in addition to general conditions of clause 45. In case the conditions are not fulfilled, the underwriting facility shall be considered as credit enhancement,
- Liquidity Facility
A liquidity facility is provided with the intention to smoothen the timing difference between the receipt of cash flows from the underlying assets and the payments to be made to the investors. Thus, the same is to support temporary liquidity mismatches/gaps.
Liquidity facility is not credit enhancement. Some notable features are:
- The facility is to meet the temporary cash flow mismatches and not meeting the expenses of the securitisation or losses;
- Funding is to be made available to the SPV and not to the investors;
- Once the liquidity facility is drawn-down, the liquidity facility provider shall have priority of claims over future cash flows and shall be super senior to the claims of the senior investors.
Typically, liquidity facility takes the form of the following:
- Servicer advance: Here the servicer itself extends out of its own pocket to make payments as per the structure and subsequently the same is reimbursed from the collections made from the portfolio. The reimbursement to the servicer in this case becomes the priority as soon as the collections are made;
- Bank facilities: Here a revolving facility is opened with a bank. Drawdowns are made as and when need arises. This is common in case of pay-through structures.
- Cash collateral: This is the most common form of liquidity enhancement, though, India, cash collateral is used as a credit enhancement. Cash collateral is hard collateral to meet periodic delinquencies. Even though having cash collateral is the ideal situation for the investors, however, for the originator cash collateral leads to a negative carry.
9. Interest rate swaps/Currency swaps
In securitization, interest rate swaps (IRS) and currency swaps (CS) play a crucial role in managing interest rate and currency risks, respectively. These financial instruments help align the cash flows of the underlying assets with investor preferences or hedge against market fluctuations.
For instance, in a securitization structure where the underlying pool of loans carries a floating interest rate, but investors prefer fixed-rate returns, an interest rate swap can be employed to convert the floating-rate payments into fixed-rate payments, ensuring alignment with investor expectations. However, it is important to note that interest rate swaps do not serve as credit enhancements, as their purpose is not to cover shortfalls in investor payments but rather to mitigate interest rate risk.
Additionally, since the Special Purpose Vehicle (SPV) legally owns the underlying loan pool, any interest rate swap arrangements must be executed by the SPV to effectively manage interest rate exposure within the securitization structure.
In respect of currency swaps these are particularly useful in cross-border securitization when the underlying asset pool is denominated in one currency, but investors require payments in another. For example: Suppose a SPV securitizes a pool of auto loans in India denominated in Indian Rupees (INR) but attracts global investors who prefer to receive payments in U.S. Dollars (USD). Since the cash inflows are in INR but the SPV needs to make payments to investors in USD, it is exposed to foreign exchange risk. To mitigate this, the SPV enters a currency swap agreement with a bank or financial institution. Under this agreement, the SPV exchanges INR denominated cash flows for USD at a predetermined exchange rate.
- Tranched cover
For definition of tranched cover reference may be drawn to Basel: CRE 22, which defines “tranched cover” under para CRE 22.93 as: tranched cover is a mechanism of transfer of an exposure in one or more tranches to a protection seller or sellers. Further as per the definition of “tranched cover”some level of risk of the loan pool is required to be retained by the originator; and the risk transferred and the risk retained are of different seniority. Further as per the definition, tranched cover can only be provided for the senior tranches (eg second loss portion) or the junior tranche (eg first loss portion). Usually tranched covers are provided in the form of a guarantee issued by the protection seller or providing cash collateral by such a seller.
The graphic below shows the overall universe of securitisation exposure.
Figure: Summarizing the meaning of securitisation exposures
Other Resources
We have over the years developed several other resources on securitisation. Should the reader wish to understand this area better, reference may be had to below comprehensive resources
- Write-Ups and Reports
- Securitisation Primer (For a primer on the basic principles underlying securitisation.)
- Indian Securitisation Report, 2019 (For a holistic introduction to securitisation in India, the motivation for parties in a securitisation transaction, and regulatory framework for securitisation in India)
- Vikas Path: The securitised path to Financial Inclusion (2024) (For curated resources on securitisation and co-lending, including: securitisation mechanics, accounting, tax aspects, compliance, etc.)
- Taxation in Securitisation: A judicial overview
- Securitisation of MSME receivables in India
- Our securitisation resource centre: For other write-ups and material in this space
- Youtube Videos
- Regulatory representations and Advocacy
Secure with Securitisation: Global Volumes Expected to Rise in 2025
-Dayita Kanodia (finserv@vinodkothari.com)
Despite global macroeconomic challenges, including persistent inflation, securitization volumes and ratings across most structured finance asset classes demonstrated remarkable stability in FY 2024. Strong housing markets bolstered credit performance in sectors like U.S. and Australian RMBS, while European housing markets faced concerns of overvaluation.
Overall, the performance of the securitisation market in FY 2024 was considered to be stable with a few exceptions of leveraged lending and collateralized loan obligations (CLOs) which remained in focus for numerous reasons, including their elevated exposures to lower-rated obligors.1
This article delves into the securitization trends observed in FY 2025, analyzing the market’s performance and offering insights into future projections.
Global Securitisation Volumes for FY 2025
US
As of December 2024, the total US Structured Finance issuance reached USD 770 Billion. In this, the total RMBS issuance accounted for USD 137.9 Billion (17.9% of the total structured finance issuance). It may be noted that total RMBS issuance for FY 2023 amounted to USD 78 Billion, therefore leading to an increase of roughly 76% in the current fiscal year. Securitisation of Credit Card receivables accounted for about USD 20.6 Billion while auto loans accounted for USD 126.4 Billion.2
As per S&P Global, the total credit card ABS issuance will be about $33 billion in 2025 thus leading to a 60% increase from the previous year. It also estimates the total RMBS issuance to reach USD 160 Billion supported by home price appreciation and low unemployment rates.
The below chart shows structured finance issuances by sub-sector:
Traditionally, US data has excluded agency-backed transactions (the data above, therefore, would mostly be non-qualifying residential mortgage loans). SIFMA data shows that agency and non-agency RMBS issuance added to USD 1.592 trillion, registering an increase of 21%. This includes an increase of 119% in non-agency RMBS, and about 19% in agency-RMBS.
Yet another segment which is typically boosted by the benign credit conditions is CMBS. US CMBS volumes touched USD 103 billion [S&P data]. This is over 2.5 X of the volume seen last year.
European Market
European securitisation issuance in 2024 reached USD 142 billion, reflecting an over 50% increase compared to 2023.While fewer outstanding transactions in the European securitisation market are anticipated to hit their call dates in 2025, typically a factor that negatively impacts volumes; improvements in underlying credit originations offer a positive outlook3.
A highlight of 2024 was the record-setting bank-originated securitisations, which soared to a 12-year high of over USD 36 billion. Additionally, sustainable-labelled securitisation rebounded strongly, with issuances exceeding USD 5 billion during the year. RMBS volumes in Europe rose by approximately 60% to USD 46 billion, a trend likely to persist into 2025.
The below chart shows the RMBS and ABS issuance over last 3 years in the European market:
China
In China, new securitization issuances grew by 4.8% year-on-year to USD 200 billion during 1Q-3Q 2024. Issuances of consumer loan ABS and account receivables ABS saw noticeable growth and MSE loan ABS issuances surged by 76%. However, the issuance of certain major asset classes, such as auto loan ABS declined significantly (Auto loan ABS issuance fell 39% in 1Q-3Q 2024 to USD 11.83 billion. The number of transactions issued during the period dropped to 22 from 29 a year earlier).4
Consultation on Securitisation
A highpoint of the EU securitisation market in 2024 is the consultation by the European Commission to mend the regulatory framework for securitisation. This exercise was prompted by several positive noises about securitisation at a policy-makers’ level. Enrico Letta, former Italian Prime Minister, in his report to the EU, made a strong case for securitisation. He said: “Securitization acts as a unique link between credit and capital markets. In this sense, the securitization market offers significant potential. Increasing its utilization brings two key benefits: i) broadening and diversifying the pool of assets available for investment, and ii) unlocking banks’ balance sheet capacity to facilitate additional financing. Moreover, the adoption of green securitization, whether through securitizing green assets or directing securitization proceeds towards green financing, holds promise as a significant contributor to the transition towards sustainability. Therefore, we advocate for reforms in the European securitization framework to enhance its accessibility and effectiveness”5 In addition, comments by Noyer and those by Mario Draghi favoured changes in securitisation framework. Thus, in October, 2024, the Eurpean Commission began a targeted consultation on several aspects of securitisation market. The responses from the consultation are currently available on the Commission’s website.
Surge in CLO market
One of the notable developments in 2024 was the surge in CLO volumes. US CDO/CLO issuance, as per SIFMA statistics, recorded an issuance volume of USD 85 billion, which is 195% higher than the issuance last year. European CLO volume registered a volume of Euro 46 billion, substantially higher than last year. One report, citing a BofA research, states that the global outstanding CLO volume reached nearly USD 1.2 trillion.
The growth in the CLO market is a direct result of the activity in the leveraged loan market, as the feedstock of CLOs primarily is leveraged loans. Leveraged loans, a term that is rather understood than defined, is mostly low-rated loans to entities that are already carrying significant leverage. The US leveraged loan market adds to upwards of USD 1.2 trillion, and that in Europe stood at about Euro 280 billion. Most of these leveraged loans tend to “syndicated” or downsold in pieces to various participating banks – which may number from a dozen to even 200, and hence, reflecting the extent of lender participation, this market is called “broadly syndicated loan” or BSL market.
While private credit financiers are increasingly making inroads into the space, a lot of capital in the leveraged loan market comes from CLOs.
Another interesting development in the US CLO market has been the growth of CLO ETFs. A report by S&P says that CLO ETFs’ AUM rose from USD 120 million in 2020 to USD 19 billion in Nov., 2024.
Regulatory updates
UK enacted the Securitisation Regulations, 2024, which replaced the earlier 2017 Regulations. Pursuant to the Regulations, the Financial Conduct Authority has framed the set of rules called Securitisation Sourcebook. The rules lay particular emphasis on the Simple, transparent and standardised (STS criteria) of securitisation transactions, and by way of amendments made later in the year, bar the domiciling of SPVs in certain high risk jurisdictions.
Growth in synthetic securitisation
Synthetic securitisation, also sometimes known as synthetic risk transfer or significant risk transfer (SRT) transactions, were mostly limited to Europe and SE Asia jurisdictions, due to lack of clarity on regulatory capital treatment in the USA. In Sept., 2023, the Federal Reserve board clarified that capital relief will be applicable in case of synthetic transactions. Since the clarification, US share in global synthetic securitisations grew to over 30%, from a small fraction earlier. The IMF Global Financial Stability Report of October, 2024 states that globally, more than $1.1 trillion in assets have been synthetically securitized since 2016, of which almost two-thirds were in Europe.
The said IMF report highlights several risks of SRT transactions. First of all, it states, basis anecdotal evidence, that banks are providing funding to credit funds for buying tranches of SRT deals of other banks, thereby implying that the risks are eventually within the banking system. It also states that SRTs may “mask banks’ degree of resilience because they may increase a bank’s regulatory capital ratio while its overall capital level remains unchanged.” Furthermore, overreliance on SRTs exposes banks to business challenges should liquidity from the SRT market dry up. Financial innovation may lead to securitization of riskier asset pools, challenging banks with less sophisticated tools for risk management, because some more complex products make the identity of the ultimate risk holder less clear. Finally, although lower capital charges at a bank level are reasonable, given the risk transfer, cross-sector regulatory arbitrage may reduce capital buffers in the broad financial system while overall risks remain largely unchanged.
Sustainable-labelled Securitisation
The European market saw an issuance exceeding USD 5 Billion during 2024 with first time issuances in solar ABS sectors.
In the U.S., government-sponsored enterprises are purchasing mortgage pools targeting low-carbon buildings and refinancing these assets in the mortgage-backed securities market to finance energy and water efficiency programmes6. For instance, in September 2024, Fannie Mae a GSE came up with a single family green bond framework. Under this framework, loans which conform to the eligibility requirements are acquired from lenders and are securitised into Fannie Mae MBS which are either delivered to the lenders or sold to investors. Here, only projects achieving certain environmental performance standards such as Solar Loans and water efficiency loans are eligible7
Indian Securitisation Market8
Securitisation volumes surged about 27% on-year to Rs 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 Rs 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 Rs 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.
Among asset classes, vehicle loans (including commercial vehicles and two-wheelers) accounted for 48% of securitisation volume (vs 40% in the corresponding period last fiscal).
Mortgage-backed loans accounted for about 23% of securitisation volume (vs 20% in the corresponding period last fiscal).
Overall, the Indian Securitisation Market volume is expected to reach Rs 2.4 trillion by the end of FY2025.
On the regulatory front, SEBI, in its board meeting dated December 18, 2024, approved amendments to the framework for the issuance and listing of Securitised Debt Instruments (SDIs). These amendments aim to expand the SDI market and align the regulations with the current securitisation norms prescribed for RBI-regulated entities.
This growth trajectory is expected to persist into FY26, fueled by strong securitization volumes and the expanding involvement of private sector banks. With evolving market dynamics and growing investor confidence, the securitization market is poised for sustained momentum for years to come.
- India securitisation volumes 2024: Has co-lending taken the sheen?
- Indian securitisation enters a new phase: Banks originate with a bang
- Securitisation: Indian market grows amidst global volume contraction
- https://www.spglobal.com/_assets/documents/ratings/research/101591938.pdf
↩︎ - https://www.spglobal.com/_assets/documents/ratings/research/101610419.pdf
↩︎ - https://www.spglobal.com/ratings/en/research/pdf-articles/easset_upload_file78691_3234527_e.pdf
↩︎ - https://www.spglobal.com/_assets/documents/ratings/research/101607929.pdf
↩︎ - https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by-enrico-letta.pdf
↩︎ - https://www.spglobal.com/_assets/documents/ratings/research/101604403.pdf ↩︎
- https://capitalmarkets.fanniemae.com/media/20626/display
↩︎ - Source – https://www.crisilratings.com/en/home/newsroom/press-releases/2025/01/securitisation-volume-up-27percent-in-nine-months-of-this-fiscal.html
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Securitisation Resource Centre
Securitisation is a cornerstone of modern financial markets, driving liquidity, risk distribution, and innovative funding solutions. This page consolidates all our articles on securitisation, offering insights into regulatory developments, market practices, and evolving structures.
Full Day Workshop on Securitisation,Transfer of Loans and Co-lending
Register here for the Pre-Summit Workshop: https://forms.gle/TGQBkVXgzX8Ho5ts8
Our resources on new Securitisation and Transfer of Loan Directions
- Lecture on basics of Securitisation available on YouTube
- Securitisation Primer
- Evolution of securitisation – Genesis of MBS
- Global Securitisation Markets in 2021: A Robust Year for Structured Finance
- Securitisation Glossary
- After 15 years: New Securitisation regulatory framework takes effect
- One stop RBI norms on transfer of loan exposures
- Loan Participations: The Rising Star of Loan Markets
- FAQs on Securitisation of Standard Assets
- FAQs on Transfer of Loan Exposure
- Legal Issues in Securitization
- Has the cover fallen off Covered Bonds?
- Security Token Offerings & their Application to Structured Finance
- Resurgence of synthetic securitisations: Capital-relief driven transactions scale new peaks
- Understanding the budding concept of green securitization
Full Day Workshop on Securitisation,Transfer of Loans and Co-lending
Register here:
https://forms.gle/kbjwwAmayAWKJwZr5
Our resources on new Securitisation and Transfer of Loan Directions
- Lecture on basics of Securitisation available on YouTube
- Securitisation Primer
- Evolution of securitisation – Genesis of MBS
- Global Securitisation Markets in 2021: A Robust Year for Structured Finance
- Securitisation Glossary
- After 15 years: New Securitisation regulatory framework takes effect
- One stop RBI norms on transfer of loan exposures
- Loan Participations: The Rising Star of Loan Markets
- FAQs on Securitisation of Standard Assets
- FAQs on Transfer of Loan Exposure
- Legal Issues in Securitization
- Has the cover fallen off Covered Bonds?
- Security Token Offerings & their Application to Structured Finance
- Resurgence of synthetic securitisations: Capital-relief driven transactions scale new peaks
- Understanding the budding concept of green securitization