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– Anita Baid, Dayita Kanodia & Chirag Agarwal | finserv@vinodkothari.com
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Repossessed, Revalued, Regulated: RBI’s framework for treatment of repossessed property
-Anita Baid & Dayita Kanodia | finserv@vinodkothari.com
RBI, on May 5, 2026, came out with the draft directions on Specified Non-financial Assets (SNFA). These directions have been introduced with the intent of specifying the treatment of non-financial and non-banking assets, particularly immovable property, acquired by the lender in satisfaction of their claims on the borrower.
It is relevant to note that a common framework has been introduced for banks and NBFC, which is in contradiction to the recent consolidation approach adopted by the Department of Regulations. This could possibly also create confusion as to the treatment of non-banking assets relevant for banks, being referred to under the common framework, to be also made applicable on NBFC. In case of banks, the Banking Regulations Act prohibits banks from holding such non-banking assets (NBAs) beyond a period of 7 years, except for property acquired for own use.
Key Highlights of the Proposal:
Our comments on the key proposals have been provided below:
- SNFA would include those immovable assets which are acquired by a RE in satisfaction or part satisfaction of its claims on the borrower along with the non-banking assets as per Section 9 of the BR Act.
VKC comment: This would mean that movable property, like vehicles, equipment, is not being covered under the purview of these regulations. Further, the restriction on banks as provided under the BR Act to acquire any immovable assets other than assets put to its own use should not apply to NBFCs.
- The SNFA can only be acquired by the RE concerned when
- The RE’s exposure to a borrower is classified as non-performing, and
- Where other means of recovery have been explored and deemed unviable.
VKC comment: This could be practically challenging since in certain adverse situations (like fraud classification) the RE may not want to wait for the asset to turn into an NPA before repossession is done. However, practically, evaluation and classification as fraud would easily take 90 days.
Further, the fact that all other means of recovery has been explored and deemed unviable would be very subjective to establish.
- Acquisition will result in proportionate extinguishment of the exposure in lieu of which the SNFA is being acquired. Any part extinguishment of claims by the RE concerned would be deemed as restructuring
VKC comment: It is understood that any compromise settlement of the dues would be done as per the extant regulations for banks and NBFCs (as the case may be) and the amount outstanding post such settlement shall be considered to determine the remaining claims, if any.
- Upon acquisition, the SNFA shall be recorded in the balance sheet at the lower of-
- The NBV of the extinguished exposure or
- The distress sale value of the SNFA arrived at by at least two independent external valuers.
At each subsequent reporting date, the SNFA shall be carried on the balance sheet at the lower of the last available distress sale value, or the revised NBV (value of extinguished exposure, net of the notional provisions applicable had the exposure continued on the books of the RE).
VKC Comment: The accounting treatment of the SNFA should have been governed as per the provisions of the accounting standards (para 3.2.23 of Ind AS 109). There could be a possible conflict since the accounting standards require the asset to be recognised on fair value.
- Post-acquisition, the SNFA will be revalued at least once every two years on a distress sale basis. The reasons for failure to dispose of the asset earlier shall also be recorded. Valuation gains should be ignored and any diminution in value should be recognised in profit and loss statement immediately.
- Any accrued interest or charges with respect to the exposure shall not be recognised till the SNFA is actually disposed off and such interest or charges are received by the RE.
VKC Comment: This is consistent with the IRAC provisions which requires the RE to shift from accrual accounting to cash basis accounting upon the asset turning into an NPA.
- Any expense/income incurred for the SNFA should be recognised in the P/L account for the year in which the same is incurred/earned.
- Disposal of such SNFA shall be by way of a public auction following the SARFAESI procedures
VKC Comment: SARFAESI is applicable to NBFCs having an asset size of more than 100 crore and where the outstanding amount is a minimum of ₹20 L. Accordingly, in some cases, SARFAESI may not be applicable at all. In such cases, following SARFAESI procedures should ideally not be made mandatory.
- SNFA cannot be sold back to the borrower or its RPs (as defined under the IBC, 2016)
VKC Comments: Even under IBC, 29A bars the borrower and its connected persons from bidding on the repossessed assets (except for certain exemptions in case of MSME borrowers).
- In case of failure to dispose the SNFA within earlier of:
- 7 years from the date of acquisition or
- The carrying value becoming zero
the asset shall be deemed to have been employed for its own use by the RE and will be recorded as a fixed asset.
VKC Comments: It seems unclear if the RE concerned can put the assets to its own use immediately on the acquisition of such assets.
- Specific disclosure to be made as a part of the financial statements as per the format prescribed by RBI.
Also, read our article,
ECL Framework for Banks: Key Highlights
See our article A[U]n Expected Injury: ECL is here, likely to hurt bank profits and retained earnings in FY28 for an in-depth analysis.
A[U]n Expected Injury: ECL is here, likely to hurt bank profits and retained earnings in FY28
Team Finserv | finserv@vinodkothari.com
Additionally, upfront fair valuation may also deplete retained earnings
The new ECL framework marks a major regulatory shift for India’s banking sector; it has been long overdue, and therefore, there was no case that the RBI could have deferred it further; pleadings to defer the implementation were rejected by the regulator. It comes coupled with regulatory floors for provisions, which would cause a major increase in provisioning requirements over the earlier requirements. Our assessment, on a very conservative basis, is that the first hit to Bank P/Ls will be at least Rs 60000 crores in the aggregate.
This is in addition to fair valuation requirement on upfront adoption, as on 1st April, 2027. While a vaguely worded part in para 19 was inserted on suggestions of the stakeholders, if interest rates have moved up since the date of the original loan, there will be almost a sure case of upfront valuation loss, which will eat up retained earnings.
RBI had come up with a draft framework on ECL pursuant to the Statement on Developmental and Regulatory Policies, wherein it indicated its intention to replace the extant framework based on incurred loss with an ECL approach. The final regulations were notified on 26th April and are applicable w.e.f 1.04.2027 i.e., for FY 27-28. The manner of implementation will be that all loans as on 1st April 2027 will be fair valued, and all new loans/financial instruments originated or acquired on or after 1st April 2027 will be subject to ECL provisions. See the highlights of the final regulations here.
A major impact that the directions will have on the Banking sector is the need to maintain increased provisioning pursuant to a shift from an incurred loss framework to the ECL framework. Under the earlier framework, banks made provisions only after a loss has incurred, i.e., when loans actually turn non-performing. The newECL model, however, requires banks to anticipate potential credit losses and set aside provisions for such anticipated losses.
Banks presently classify an asset as SMA1 when it hits 30 DPD, and SMA2 when it turns 60. Both these, however, are standard assets, which currently call for 0.4% provision. Under ECL norms, both these will be treated as Stage 2 assets, which calls for a lifetime probability of loss, with a regulatory floor of 5%. Thus, the differential provision here becomes 4.6%.
Once an asset turns NPA, the present regulatory requirement is a 15% provision; the ECL framework puts these assets under Stage 3, where the regulatory minimum provision, depending on the collateral and ageing, may range from 25% to 100%. Our Table below gives a more granular comparison.
| Type of asset | Asset classification | Existing requirement | New requirement w.e.f 1.04.2027 | Difference |
|---|---|---|---|---|
| Farm Credit, Loan to Small and Micro Enterprises | SMA 0 | 0.25% | 0.25% | – |
| SMA 1 | 0.25% | 5% | 4.75% | |
| SMA 2 | 0.25% | 5% | 4.75% | |
| NPA | 15% | 25%-100% based on Vintage | 10%-85% based on Vintage | |
| Commercial real estate loans | SMA 0 | 1% | Construction Phase -1.25% Operational Phase – 1% | Construction Phase -0.25% Operational Phase – Nil |
| SMA 1 | 1% | Construction Phase -1.8125% Operational Phase – 1.5625% | Construction Phase -0.8125% Operational Phase – 0.5625% | |
| SMA 2 | 1% | Construction Phase -1.8125% Operational Phase – 1.5625% | Construction Phase -0.8125% Operational Phase – 0.5625% | |
| NPA | 15% | 25%-100% based on Vintage | 10%-85% based on Vintage | |
| Secured retail loans, Corporate Loan, Loan to Medium Enterprises | SMA 0 | 0.4% | 0.4% | – |
| SMA 1 | 0.4% | 5% (0.4% for loans against FD, NSC, LIC and KVP) (2.5% for direct exposures to/guaranteed by State Governments) | 4.6% No change for loans against FD, NSC, LIC and KVP | |
| SMA 2 | 0.4% | 5%(0.4% for loans against FD, NSC, LIC and KVP) (2.5% for direct exposures to/guaranteed by State Governments) | 4.6% No change for loans against FD, NSC, LIC and KVP | |
| NPA | 15% | 25%-100% based on Vintage 10%-100% for loans against FD, NSC, LIC and KVP and for direct exposures to/guaranteed by State Government) | 10%-85% based on Vintage | |
| Exposures under various schemes of Credit Guarantee Fund Trust for Micro andSmall Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low IncomeHousing (CRGFTLIH) and National Credit Guarantee Trustee Company Ltd (NCGTC) | SMA 0 | 0.4% | 0.25% | 0.15% |
| SMA 1 | 0.4% | 0.25% | 0.15% | |
| SMA 2 | 0.4% | 0.25% | 0.15% | |
| NPA | No provision for the guaranteed portion. NPA provisioning as per extant guidelines for the portion outstanding in excess of the guarantee (Only when the Governmentrepudiates its guarantee when invoked) | 10%-100% based on vintage for secured and guaranteed portion 25%-100% based on vintage for unsecured and unguaranteed portion (Only if the claims are not settled with ninety datesfrom the due date of the loan) | ||
| Home Loans | SMA 0 | 0.25% | 0.25% | 0.15% |
| SMA 1 | 0.25% | 1.5% | 1.25% | |
| SMA 2 | 0.25% | 1.5% | 1.25% | |
| NPA | 15% | 10%-100% based on Vintage | (-)5% – 85% based on Vintage | |
| LAP | SMA 0 | 0.4% | 0.4% | – |
| SMA 1 | 0.4% | 1.5% | 1.1% | |
| SMA 2 | 0.4% | 1.5% | 1.1% | |
| NPA | 15% | 10%-100% based on Vintage | (-)5% – 85% based on Vintage | |
| Unsecured Retail loan | SMA 0 | 0.4% | 1% | 0.6% |
| SMA 1 | 0.4% | 5% | 4.6% | |
| SMA 2 | 0.4% | 5% | 4.6% | |
| NPA | 25% | 25%-100% based on Vintage | 0%-75% based on Vintage |
The actual impact of such additional provisioning will be a hit of more than 3% to the profit of banks. Based on the RBI Financial Stability Report of FY 24-25, the current level of SMA and NPA is estimated to be ₹3,78,000 crores (2%) and ₹4,28,000 crores (2.3%), respectively.
Accordingly, an additional provision of approximately ₹ 18,000 crores (4.6% of SMA volume) and ₹ 42,000 crores (10% of NPA volume) will be required for SMA and NPA respectively, leading to a total impact of at least ₹60,000 crores. This estimate has been arrived at by considering the % of NPAs and SMA-1 & SMA-2 portfolios of banks. The actual impact may be higher, as lot of loans may be unsecured, and may have ageing exceeding 1 year, in which case the differential provision may be higher.
It may be noted that while the draft directions allow Banks to add back the excess ECL provisioning to the CET 1 capital, it does not neutralize the immediate profitability impact, as the additional provisions would still flow through the profit and loss account.
How do we expect banks to smoothen this hit that may affect the FY 27-28 P/L statements? We hold the view that it will be prudent for banks, who have system capabilities, to estimate their ECL differential, and create an additional provision in FY 25-26, or do technical write-offs.
Effective Interest Rate requirement applies to all loans effective 1st April, 2027
ECL does not come alone; it comes along with the Ind AS 109 companion – the requirement to compute effective interest rate (EIR) for all financial assets and financial instruments. How does EIR requirement differ from the existing rate of interest/internal rate of return approach? Because EIR has the impact of amortising loan acquisition costs or upfront fees. Currently, banks could have taken the upfront earnings such as processing or origination fees/costs directly to revenue – these will now have to part of the EIR computation. More than impacting the profit number, EIR creates a significant impact on loan management systems, as it results in dual computations – the accounting balances and the customer LMS balances are likely to be different.
Upfront recognition of fair value changes
Para 19 requires that on 1st April, 2027, that is, the date of first adoption, all financial assets and instruments will be fair valued, and the fair value changes (gains or losses) will be adjusted against retained earnings. This is consistent with the principles of first time adoption of Ind AS.
On stakeholder representation, the RBI added this part to Para 19:
Where facts and circumstances indicate that the transaction has been undertaken on terms such that the fair value of the financial asset is not materially different from its carrying cost, the same shall be presumed to be the best evidence of fair value.
What does this imply? If the terms of the financial facility have remained the same, does it mean no fair valuation has to be done? Surely no, at least in our opinion. Any fair value change in fixed rate instruments happens for two reasons: change in credit spreads (rating changes, credit quality changes, etc), or change in rate of interest. If there is a facility extended, say at a rate of interest of 8%, whereas the prevailing rate of interest for a borrower of similar credit standing has moved up to 10%, will there be a fair value decrease? Surely yes.
There are lots of loans which were extended during Covid or periods of low interest rates, which are still continuing. In all such cases, fair value losses are imminent.
The meaning of the para above can only be that if the terms of the original facility are similar to what they would currently be, then the fair value will not have to be computed.
See our other resources:
RBI’s Draft PPI Norms: Stricter Cash Rules, Simplified Categories, No Cross Border Payments and More
Simrat Singh and Jeel Ranavat | Finserv@vinodkothari.com
The RBI has proposed an overhaul of the existing prepaid payment instruments (PPI) framework through its draft Master Direction, 2026. The changes aim to, inter-alia, simplify classification, tighten cash usage, restrict cross border payments etc. In this note, we discuss some of the key proposals of the draft master directions.
Simpler classification
Two overarching categories are proposed:
- General Purpose PPI: Comprising Full-KYC PPI and Small PPI (single type, no further sub-types);
- Special Purpose PPI: comprising Gift PPI, Transit PPI, PPI for Foreign Nationals/NRIs (UPI One World) and any other with prior RBI approval. PPI-MTS renamed into Transit PPI
Credit card loading restricted
With a view to curb ‘loan-loaded PPIs’, it is proposed that credit cards can now be used only for Special Purpose PPIs, while General Purpose PPIs are limited to bank account debit, cash or another PPI. This signals a clear intent to ring-fence credit-backed spending to specific use cases. See our resource around loan loaded PPIs here.
Statutory auditor certification for net worth compliance
The draft introduces a procedural clarification by requiring non-bank PPI applicants to submit a certificate from their statutory auditor confirming compliance with the minimum net worth criteria of ₹5 Crores. While the threshold itself remains unchanged, earlier a CA certificate was required; the draft now specifically mandates certification by the statutory auditor in a prescribed format..
Sharp cut in cash usage
Cash usage sees the biggest tightening. Cash loading for Full-KYC PPIs is reduced from ₹50,000 to ₹10,000 per month, pushing higher-value transactions towards bank-linked digital modes. The move appears designed to curb anonymity and improve traceability.
P2P transfers also curtailed
Peer-to-peer transfer (i.e. transfer to another person’s bank account or PPI) limits have been standardised. Instead of differentiated limits based on beneficiary registration, a flat cap of ₹25,000 per month is now proposed.
Monthly usage cap formalised
While earlier regulations relied on outstanding balance caps, the draft introduces an explicit ₹2 lakh monthly debit limit for Full-KYC PPIs. In substance, this aligns with the existing ceiling but adds clarity on usage.
Banks get faster go-live
Banks issuing PPIs will no longer require prior approval if they are already qualified to issue debit cards. A prior intimation to RBI will be sufficient, allowing faster product launches. This acknowledges that regulated banks already meet baseline prudential standards.
This significantly reduces time-to-market and reflects regulatory reliance on the existing prudential and compliance standards applicable to banks. The change is expected to enhance agility, support faster product innovation, and strengthen banks’ participation in the digital payments ecosystem.
Non-bank approvals streamlined
For non-bank issuers, the process is simplified with perpetual authorisation and removal of the explicit in-principle approval stage. The timeline for submission post-regulatory NOC is also relaxed to 45 days from the earlier requirement of 30 days. The draft is silent on the earlier requirement of submitting a System Audit Report (SAR) at the time of authorisation. However, an IS Audit report is proposed to be submitted annually by the issuer.
Core portion interest computation shifts to monthly basis
The draft revises the methodology for computing interest on the core portion by moving from a fortnightly to a monthly calculation framework. Instead of averaging 26 lowest fortnightly balances, issuers will now compute the average of 12 lowest monthly outstanding balances, with the minimum one-year operational requirement continuing. This change appears to be a pragmatic step towards operational simplification, reducing computational intensity while aligning the framework with more conventional monthly cycles. While the earlier explicit restriction on availing loans against such deposits is not reiterated, the fiduciary nature of PPI funds implies that pledging or leveraging customer balances would, in our view, remain impermissible.
Foreign wallet norms liberalised; A push for UPI One World
In contrast to tightening elsewhere, the framework for foreign users is expanded. The UPI One World wallet will now be available to all foreign nationals and NRIs, with a higher ₹5 lakh monthly usage limit.
This step is aimed at making UPI more accessible to international users, especially inbound travellers who often face challenges in using domestic payment systems. By enabling seamless, wallet-based access to UPI, the framework improves convenience and enhances the overall payment experience in India.
Cross-border usage removed
A key change is the blanket removal of cross-border transaction capability for PPIs. Earlier, AD-1 bank issued PPIs could be used for limited overseas transactions. The draft eliminates this entirely, narrowing the scope of PPIs.
Other notable changes
Closed system PPIs continue to remain outside regulation but marketplaces are explicitly excluded from claiming this status. The definition of “merchant” has been broadened, removing the requirement of contractual acceptance. Small PPIs will now expire after 24 months with mandatory balance transfer in case the same has not been converted into Full-KYC PPI, instead of merely restricting further credits.
See our existing resources on PPI:
Workshop on Financial Sector Entities: RBI Related Party Lending Restrictions and Related Party Transactions under Listing Regulations /Companies Act
Register your interest: https://forms.gle/csBgaWLpmantMK4d8
RBI Proposes TReDS Overhaul in Draft 2026 Directions
Introduces Credit Guarantee, Mandatory CERSAI Registration among other changes.
RBI has released draft Reserve Bank of India (Trade Receivables Discounting System) Directions, 2026, proposing a comprehensive overhaul of the existing TReDS framework. These draft directions, if notfied, will replace all existing directions and circulars on TReDs.
Below are the 5 key changes proposed:
🔹Introduction of credit guarantee:
Financiers are now permitted to avail credit guarantee cover (via NCGTC) for exposures on TReDS. This is a significant step towards de-risking receivables financing and encouraging wider participation by lenders. Notably, RBI had already expanded the ecosystem in 2023 by permitting insurers as participants to provide credit insurance cover for such exposures.
🔹 Simplified onboarding for MSMEs:
In line with the Governor’s statement, the draft seeks to streamline MSME onboarding by removing the earlier requirement on due diligence of the MSME prior to onboarding.
🔹 Mandatory registration of assignment with CERSAI:
The draft mandates (earlier recommended) registration of assignment of receivables with CERSAI, strengthening legal enforceability and improving transparency of receivables financing transactions.
🔹Annual, monthly and event-based reporting requirements:
Annually (by 30 Sept): submit audited net-worth certificate and IS/Cyber Security Audit report.
Monthly (by 7th): submit TReDS statistics.
Event-based: report any change in Board along with director declaration/undertaking.
🔹Minimum net worth of Rs. 25 Crores for entities setting up a TReDS
The draft requires TReDS entities to maintain a minimum net worth of ₹25 crore (replacing the earlier paid-up capital requirement), duly certified by the statutory auditor. Existing players must meet this requirement by 31 March 2027.
Link to the draft directions: https://lnkd.in/gkuHNJW9
Indian Securitisation in FY26: Securitised Paper Volumes grow, with originator and asset diversity
– Vinod Kothari & Chirag Agarwal | finserv@vinodkothari.com
Volumes of securitisation (which, of course, have always included bilateral assignments or so-called DA transactions) fell by 6% in FY 26, if the origination volume by Reliance group entities in the first half were to be excluded. However, the market has shown more originator diversity, with an increasing share of smaller issuers, including those tasting the market for the first time.
The dip in volumes is because of the larger issuers who were prominently absent or subdued – Shriram Finance as the largest issuer having raised on-balance sheet liquidity, and banking companies. However, the share of gold loans went up sharply, largely due to the sharp increase in gold prices and gold lending, Microfinance companies went more for securitisation, rather than direct assignment transactions.
For anyone studying the Indian securitisation market, it is important to note the following:
- Reported volumes in India include direct assignments, which, in international parlance, are not “securitisation” (pure bilateral loan sales). However, in India, traditionally, DA has been a close and quick proxy for securitisation, and hence, mostly included. In FY 26, the split of DA/PTC volumes shows PTC transactions having gained in proportion. One rating agency1 reports an increase of PTC volume percentage from 54% to 60%; another one2 shows the increase from 48% to 52%.
- Indian transactions mostly show LAP transactions as a part of MBS, whereas what the world reports as RMBS is quite small in India. Last year, there was a prominent transaction by LIC Housing Finance, through the NHB-promoted RDCL. There was no RDCL issuance this year. It seems that RMBS volume was either too small to be reportable, or was completely absent.
- Microfinance sector has been under some stress in the recent past; however, MFIs have increasingly resorted to PTC issuances, with small deal sizes. Some deal sizes are even below 100 crores. This is indicating greater diversity of issuers, and of course, yields and ratings.
- The market also seems to be showing larger acceptance for lower rated securities i.e., BBB+.
Overall, in a stressful global scenario, securitisation has stood firm. Non financial sector entities have shown increasing willingness to tap the market. Of course, SEBI regulations have to be more enabling.
Below, we give a detailed overview of the securitisation market, including a discussion on the asset classes.
NBFCs vs Banks
Securitisation volumes have been largely driven by NBFCs, which recorded a 30% year-on-year increase in value. In contrast, originations by banks have declined significantly.
Recent Securitisation Structures in India – A Mix of Tradition and Innovation
Among asset classes, vehicle loans (including commercial vehicles and two-wheelers) accounted for 50% of securitisation volumes (vs 47% in the corresponding period last fiscal). Mortgage-backed loans accounted for about 28% of securitisation volume (vs 37% in the last FY).
Vehicle loan-backed securitisations dominated the market, both in terms of number of deals and total value, reaffirming the sector’s strong position. This is consistent with the growth trend in vehicle loan originations during FY 25.
In addition to vehicle loans, originators also securitised receivables from a diverse set of underlying asset classes during Q4, including:
- Microfinance Loans
- Secured Business Loans
- Unsecured Business Loans
- Home Loans
- Unsecured Personal Loans
- Gold Loans
The continued diversification in underlying asset classes highlights the evolving maturity of India’s securitisation market and growing investor appetite across segments. The break-up of securitisation volumes across various asset classes have been presented below:
Securitisation of Vehicle Loans
The issuance volume for vehicle loan securitisation during FY26 was approximately ₹1.26 lakh crores. Most of the transactions were structured as single-tranche issuances. However, a few exceptions featured more layered structures comprising senior and equity tranches, or senior, mezzanine, and equity tranches.
In terms of credit ratings, the tranches were rated between A- and AAA. Notably, the senior tranches in the majority of transactions received high investment-grade ratings, typically falling within the AA+ to AAA range. This indicates strong investor confidence and reflects the underlying credit quality of the asset pools, supported by adequate credit enhancement mechanisms.
Further, replenishing structures were also observed commonly during FY26. These variations indicate growing sophistication in transaction structuring within the vehicle loan securitisation space, aimed at catering to different investor preferences, improving credit protection, and aligning with originator risk appetite. As the market matures, further innovation in structuring and risk mitigation features can be expected.
In terms of credit enhancements, most vehicle loan securitisation transactions during the last quarter of FY26 featured: cash collateral (CC) and overcollateralisation (OC), with the Excess Interest Spread (EIS) serving as the first layer of loss absorption.
Securitisation of Microfinance Loans
During FY26, the MFI sector has seen a revival after a period of stress during FY 25 and FY 24. This has been due to better credit underwriting of lenders, improving performance trends and granular pool characteristics. Further, after a period of stress, the lenders relied on time-tested borrowers rather than exploring new markets leading to higher average ticket size of loans. This has led to a growth in the volumes of securitisation of microfinance loans during FY26. The PTC issuance volume of microfinance institutions increased to 14% of total PTC issuance in FY26 from 6% of total PTC issuances in FY25. Most of the transactions were structured as a single tranche securitisation.
Further, most microfinance loan securitisation transactions during the quarter featured credit enhancement through two primary mechanisms: CC and overcollateralisation OC, with the EIS serving as the first layer of loss absorption.
Securitisation of pool of loans backed by Home Loans & LAP
The volume of mortgage backed securitisation has been low both in terms of number as well as in terms of amount of issuance. As compared to FY25, the total MBS issuances dropped to 28% of total issuance from 37%. The transactions featured a common waterfall matrix and had received an overall rating of AAA.
In terms of credit enhancement, CC and OC has been provided as a credit enhancement with the EIS serving as the first layer of loss absorption.
Securitisation of Gold Loans
Gold loan securitisation volumes in H2FY26 stood at approximately ₹18,500 crore, significantly higher than the ₹5,000 crore recorded for the whole of FY25.
The jump in gold lending securitisation may be due to increase in gold prices and resultant increase in the value of the collateral. As a result of this valuation spike, average ticket sizes have increased, indicating that as gold valuations rise, consumers are leveraging higher-value loans to meet their financing needs. Another reason for the increased origination may be removal of LTV restriction in case of income generating gold loans.
Securitisation of Unsecured Loans
As per rating rationales published by Care the securitisation volumes of unsecured loans (both personal and business) increased during FY26. Investors in unsecured loan transactions, are preferring the PTC route, due to the support provided by external enhancement. CC and OC have also been provided as a credit enhancement with the EIS serving as the first layer of loss absorption.
- Secure with Securitisation: Global Volumes Expected to Rise in 2025
- 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
- Crisil report on securitisation volumes: https://www.crisilratings.com/en/home/newsroom/press-releases/2026/04/securitisation-deal-value-peaks-to-rs-2-55-lakh-crore-in-fiscal-2026.html ↩︎
- Care report on securitisation volumes
https://www.careratings.com/uploads/newsfiles/1775801608_FY26%20Retail%20Securitisation%20at%20Rs%202.53%20Trillion%20First%20Dip%20PostPandemic.pdf ↩︎
RBI proposes changes to NBFC-UL identification
- Anita Baid, finserv@vinodktohari.com
Revised Criteria for Classification
RBI has vide its Press Releases – Reserve Bank of India proposed to review methodology for identification of NBFCs in Upper Layer. The key changes are as follows:
- Annual Classification: RBI shall conduct an annual identification process for classification of NBFCs in the Upper Layer.
It may be noted that NBFCs belonging to the banking group are also required to comply with the compliance requirements applicable to Upper Layer NBFCs (except the listing requirement). Our article on compliances to be followed by such NBFCs in the banking group can be seen here.
- Criteria for classification: The current two-step approach (top ten by asset size and parametric scoring) will be replaced by a simple, absolute asset size criterion. The proposed asset size threshold for an NBFC to be classified as UL is ₹1,00,000 crore and above, as per the latest audited balance sheet (this limit is subject to review every 5 years).
A crucial question that arises here is whether the consolidation criteria (multiple NBFCs in the group) be applicable in this case as well to determine the asset size? Though as per prudence, it should apply, to avoid surpassing the regulatory intent, however, the same is specifically not applicable as per the SBR Directions (refer para 21) .
- Inclusion of Government-owned NBFCs: Eligible Government-owned NBFCs will now also be considered for inclusion in Upper Layer, based on the revised asset size criteria. Previously, these were placed only in the Base or Middle Layer.
It may be noted that the category of NBFC is not a pre-condition, hence, the list of UL NBFCs would include not just NBFC-ICCs but also HFCs, CICs, deposit taking NBFCs, and not even Govt. NBFCs
- Provision for Credit Risk Transfer: All NBFC-UL will be allowed to use State Government guarantees as a credit risk transfer instrument without any specific limit, provided they meet the prescribed conditions.
Implications of NBFC-UL Classification
Once the proposed criteria are implemented and the new list of Upper Layer NBFCs is notified by the RBI, entities classified as NBFC-UL will face certain immediate implications, in addition to specific corporate governance norms. The central point of discussion is how these requirements might impact the growth plans of large NBFCs.
- CET 1 requirement: NBFC-UL are required to maintain Common Equity Tier 1 capital of at least 9% of Risk Weighted Assets.
While CET 1 is currently manageable for most existing UL entities, aggressive growth plans could potentially make this a constraining factor for larger NBFCs newly classified as UL.
- Leverage Restriction: In addition to CRAR, NBFC-UL shall also be subject to leverage requirements to ensure that their growth is supported by adequate capital, among other factors. Also, NBFC-UL shall be required to hold differential provisioning towards different classes of standard assets.
Leverage ratio would have been an issue if the entity was engaged in derivatives transactions. However, most of the NBFCs in India are not very active in this space.
- Exposure Framework: NBFC-ULs are required to adhere to the Large Exposures Framework. Furthermore, their Board must determine internal exposure limits for important sectors, including exposure to the NBFC sector, in addition to limits on internal exposures to Sensitive Sector Entities (SSEs).
The applicability of the large exposure framework may be a real concern. Large exposure framework looks at economic interdependence as the basis of classification into group risk. There is an absolute limit that the single party exposure cannot be more than 20% of Tier 1 capital (including quarterly audited profits) and 25% in case of a group of counterparties.
- Listing Requirement: NBFC-ULs must be mandatorily listed within three years of being identified and notified as such. Unlisted NBFC-ULs shall be required to make the necessary arrangements for listing within this three-year period.
- CICs not accessing public funds: Under the CIC Directions, those CICs that don’t have access to public funds, irrespective of the asset size, are eligible to be classified as an unregistered CIC. Accordingly, such CICs should not be classified in the upper layer even if they breach the asset size criteria.