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SEBI Securitisation Regulations: Track Record, Risk retention and Investment size among several new requirements

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– Dayita Kanodia (finserv@vinodkothari.com)

Requirements to apply to all listed issuances, from financial and non-financial issuers

Below are the major highlights of the SDI amendment regulations:

SEBI on May 5, 2025 has issued the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) (Amendment) Regulations. 2025. It may be noted that the SDI Regulations, was first notified on 26th May, 2008, after public consultation on the proposed regulatory structure with respect to public offer and listing of SDIs, following the amendments made in the SCRA. The Regulations, originally referred to as the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008, were subsequently renamed as SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008, w.e.f. 26th June, 2018.

In order to ensure that the regulatory framework remains in accordance with the  recent developments in the securitisation market, a working group chaired by Mr. Vinod Kothari was formed to suggest changes to the 2008 SDI regulations. Based on the suggestions of the working group and deliberations of SEBI with RBI, the amendment has been issued. The amendment primarily aims to align the SEBI norms for Securitised Debt Instruments (SDIs) with that of the RBI SSA Directions which only applies in case of securitisations undertaken by RBI regulated entities.

It can be said that these amendments are not in conflict with the SSA Directions and therefore for financial sector entities while there may be some additional compliance requirements if the securitisation notes are listed, there are as such no pain points which discourages such entities to go for listing. Further, certain requirements such as MRR, MHP, minimum ticket size have only been mandated for public issue of SDIs and therefore are not applicable in case of privately placed SDIs.

This article discusses the major amendments in the SDI Framework.

Major Changes

Definition of debt

The amendment makes the following changes to the definition of debt:

  1. All financial assets now covered – In order to align the SDI Regulations with the RBI SSA Directions, the definition of ‘debt’ has been amended to cover all financial assets as permitted to be originated by an RBI regulated originator. Further, this is subject to the such classes of assets and receivables as are permissible under the RBI Directions. Note that the RBI SSA Directions does not provide a definition of ‘debt’ or ‘receivables’, however, provides a negative list of assets that cannot be securitised under Para 6(d) of the RBI SSA Directions.
  2. Equipment leasing receivables, rental receivables now covered under the definition of debt.
  3. Listed debt securities – The explicit mention of ‘listed’ debt securities may remove the ambiguity with regard to whether SDIs can be issued backed by underlying unlisted debt securities, and limits the same to only listed debt securities. The second proviso to the definition further clarifies that unlisted debt securities are not permitted as an underlying for the SDIs.
  4. Trade receivables (arising from bills or invoices duly accepted by the obligors) – As regards securitisation of trade receivables, acceptance of bills or invoices is a pre-condition for eligibility of the same as a debt under the SDI Regulations.

‘Acceptance’, in literal terms, would mean acknowledgement of the existence of receivables. Under the Negotiable Instruments Act, 1881, ‘acceptance’ is not defined, however, ‘acceptor’ is defined to mean the drawee of a bill having signed his assent upon the bill, and delivered the same, or given notice of such signing to the holder or to some person on his behalf.

Note that a bill or invoice may either be a hard copy or in digital form. In the context of digital bill, acceptance through signature is not possible; therefore, existence of no disputes indicating a non-acceptance, should be considered as a valid acceptance.

  1. Such Debt/ receivable including sustainable SDIs as may be notified by SEBI – In addition to the forms of debts covered under the SDI Regulations, powers have been reserved with SEBI to specify other forms or nature of debt/ receivable as may be covered under the aforesaid definition. Further, the clause explicitly refers to sustainable SDIs, for which a consultation had been initiated by SEBI in August 2024[1].

Conditions governing securitisation

SEBI has mandated the following conditions to be met for securitisation under the SDI Framework:

  1. No single obligor to constitute more than 25% of the asset pool – This condition has been mandated with a view to ensure appropriate diversification of the asset pool so that risk is not concentrated with only a few obligors. However, it may be noted here that the RBI regulations does not currently prescribe any such obligor concentration condition. Only in case of Simple, Transparent and Comparable securitisation transactions, there is a mandate requiring a maximum concentration of 2% of the pool for each obligor.

However, SEBI has retained the power to relax this condition. In our view, this may be relaxed by SEBI for RBI regulated entities considering that RBI does not prescribe for any such condition.

  1. All assets to be homogenous – This is yet another provision which is only required by RBI in case of STC transactions. However, even in the context of RBI regulations, what exactly constitutes a homogenous asset is mostly a subjective test. SEBI has defined homogenous to mean same or similar risk or return profile arising from the proposed underlying for a securitised debt instrument. This has made the test of homogeneity even more subjective. For the purpose of determining homogeneity, reference can be made to the homogeneity parameters laid out by RBI in case of Simple, Transparent and Comparable securitization transactions.
  2. SDIs will need to be fully paid up-  The SDIs will need to be fully paid up, i.e., partly paid up SDIs cannot be securitised. 
  3. Originators to have a track record of 3 financial years: Originators should be in the same business of originating the receivables being securitised for a period of at least three financial years. This restricts new entities from securitising their receivables. However, this condition in our view should only apply to business entities other than business entities, complying with this condition does not seem feasible. 
  4. Obligors to have a track record of 3 financial years– The intent behind this seems to to reduce the risk associated with the transaction as the obligors having a track record in the same operations which resulted in the creation of receivables being securitized. However, this condition cannot be met in most types of future flow securitisation transactions such as toll road receivables and receivables from music royalties.

SEBI has made it clear that the last two conditions of maintenance of track record of 3 years for originators and obligors will not apply in case of transactions where the originators is an RBI regulated entity.

Amendments only applicable in case of public issue of SDIs

The following amendments will only be applicable if the SDIs are issued to the public. Here, it may be noted that the maximum number of investors in case of private placement of SDIs is limited to 50.

Minimum Ticket Size

The Erstwhile SDI Regulations did not provide for any minimum ticket size. However, with a view to align the SDI regulations with that of RBI’s SSA Direction, a minimum ticket size of Rs. 1 crore has been mandated in case of originators which are RBI regulated as well as of non-RBI regulated entities. It may however be noted that the minimum ticket size requirement has only been introduced in case of public offer of SDIs. Further, in cases with SDIs having listed securities as underlying, the minimum ticket size shall be the face value of such listed security.

Securitisation is generally perceived as a sophisticated and complex structure and therefore the regulators are not comfortable in making the same available to the retail investors. Accordingly, a minimum ticket size  of Rs. 1 Crore has been mandated for public issue of SDIs. In case of privately placed SDIs, the issuer will therefore have the discretion to decide on the minimum ticket size. However, since the RBI also mandates a minimum ticket size of Rs. 1 Crore, financial sector entities will need to adhere to the same.

Here, it is also important to note that in case of public issue of SDIs with respect to originators not regulated by RBI, SEBI has made it clear that the minimum ticket size of Rs. 1 Crore should be seen both at initial subscription as well as at the time of subsequent transfers of SDIs. However, nothing has been said for subsequent transfers in cases where the originator is a RBI regulated entity. The RBI SSA Directions also requires such minimum ticket size of Rs. 1 Crore to be seen only at the time of initial subscription. This in many cases led to the securitisation notes being broken down into smaller amounts in the secondary market.

In the absence of anything mentioned for RBI regulated entities, it can be said that there is no change with respect to the ticket size for RBI regulated entities even in the case of publicly issued SDIs which should be seen only at the time of initial subscription.

It is worth mentioning that under the SSA Directions of RBI requires that in case of transactions carried out outside of the SSA Directions (the transactions undertaken by non-RBI regulated entities), the investors which are regulated by RBI have to maintain full capital charge. This therefore discourages Banks from investing in securitisation transactions which are carried out outside the ambit of the SSA Directions.  Therefore, both retail investors as well RBI regulated entities will not be the investors which will hinder liquidity and overall growth of the SDI market.

Minimum Risk Retention

Aligning with RBI’s SSA Direction, a Minimum Risk Retention (MRR) requirement for public issue of SDIs has been mandated requiring retention by the originator of a minimum of

  1. 5% in case the residual maturity of the underlying loans is upto 24 months and
  2. 10% in case residual maturity is more than 24 months

Further, in case of RMBS transactions, the MRR has been kept at 5% irrespective of the original tenure.

SEBI has aligned the entire MRR conditions with that of the RBI SSA Directions, including the quantum and form of maintenance of MRR. Accordingly, for financial sector entities, there is no change with respect to MRR.

By introducing MRR in the SDI Regulations, non-financial sector entities will be held to similar standards of accountability, skin-in-the-game, reducing the risks associated with the originate-to-sell model and aligning their practices with those of financial sector originators. This will strengthen investor confidence across the board and mitigate risks of moral hazard or lax underwriting standards.

It may however be noted here that in case of non financial originators, there could be situations where retention is being maintained in some form (for example in leasing transactions, the residual value of the leased assets continues to be held by the originator) and therefore such originators will be required to hold MRR in addition to the retention maintained.

Minimum Holding Period

SEBI has aligned the MHP conditions as prescribed under the SSA directions for all RBI regulated entities. Accordingly, there is no additional compliance requirement for RBI regulated entities. For receivables other than loans, the MHP condition will be specified by SEBI.

Exercise of Clean up Call option by the originator

The provisions for the exercise of the clean up call option has been aligned with those prescribed under the SSA Directions. These provisions have been introduced under the chapter applicable in case of public offer of SDIs. However, the SDI Regulations always provided for the exercise of clean up call option and what has been now introduced in simply the manner in which such an option has to be exercised.

In case of private placement of SDIs, can the clean up call option be exercised at a threshold exceeding 10% ?

Although the provisions for the exercise of clean up call options has been made a part of chapter applicable in case of public offers, it should however be noted that these provisions are also a part of the RBI SSA Directions. Accordingly, financial sector originators are bound by such conditions even if they go for private placement of SDIs. Further, even in the case of the non-financial sector originator, clean up call is simply the clean up of the leftovers when they serve no economic purpose. Therefore, in our view, exercising clean up calls at a higher threshold should not arise.

Other Amendments

  1. Norms for liquidity facility aligned with that of RBI regulations
  2. All references to the Companies Act 1956 has been changed to Companies Act 2013
  3. Chapter on registration of trustees has been removed and reference has been made to SEBI (Debenture Trustees) Regulations, 1993
  4. Disclosure requirements for the originator and the SPDE have been prescribed; however the disclosure formats are yet to be issued by SEBI.
  5. Public offer of SDIs to remain open for a minimum period of 2 working days and upto a maximum of 10 working days.

Amendments proposed in the SEBI(LODR) Regulations

There are primarily two regulations which govern the listing of SDIs:

  1. SEBI SDI Regulations
  2. SEBI LODR Regulations

The following amendments have been proposed in the LODR regulations:

  1. SCORES registration to be taken at the trustee level
  2. Outstanding litigations, any material developments in relation to the originator or servicer or any other party to the transaction which could be prejudicial to the interests of the investors to be disclosed on an annual basis.
  3. Servicing related defaults to be disclosed on an annual basis.

[1] Read an article on the concept of sustainable SDIs at – https://vinodkothari.com/2024/09/sustainable-securitisation-the-next-in-filling-sustainable-finance-gap-in-india

Securitisation of Stressed Assets (SOSTRA)

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NBFC Regulatory Refresher

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RBI Updates for NBFCs- A rerun of the regulatory changes introduced during FY 24-25

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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

SOSTRA: The New shastra of liquidating Non-performing loans

Webinar on 4 new major regulations on NPL Securitisation, Co-lending, Gold lending and NFB facilities

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SOSTRA: The New shastra of liquidating Non-performing loans

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-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

BasisSOSTRAAsset Reconstruction CompaniesSpecial Situation Funds
Global contextSecuritisation 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 NPLsFor driving investments into stressed loans, essentially with a view to the underlying collateral; mostly with significant upside opportunities
Indian contextSecuritisation is currently allowed for standard assets only; draft Directions now permit securitisation of NPLs, including, within a limit of 10%, stressed but standard assets27 ARCs exist; however, most of them focus on asset aggregation, IBC resolution etc. Relatively less active in retail loan spaceCumulative Data as at Dec 31, 2024: Commitments raised-2048 cr.; Funds Raised- 1531 cr; Investment made-1510 crComparatively less popular
Economic driversUnlocking the inherent value of NPLs, particularly those which are still giving regular cashflows. Pertinent in case of retail poolsResolution abilities of the ARC, in particular, sec 8 and 13 of the SARFAESI Act, legal powers and IBCInvestment 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 investmentCredit-enhanced, mostly rated investment in securitisation notes, backed by cashflows expected from the pool of securitised loans. Distributions happen on a waterfall mechanismInvestment 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 originatorNo 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/permittedDirection 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 InvestorsAny 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 poolSecuritisation requires pool diversification – Herfindahl Index to be within 0.3. Single loan or chunky loans cannot be securitisedSingle loan or chunky loans may be securitisedWill mostly be applicable in case of corporate loans undergoing JLF/IBC mechanism
Types of assets that can  be acquiredNPAs- 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 NoneNone in case of transfer to ARCNone in case of transfer to SSF;Further 6 month MHP is applicable on SSF
Enforcement of  security interest under  the SARFAESI ActPossible 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 rulingsRecommendation has been made by  SEBI to RBI to include SSFs under the  definition of ‘Secured Creditor’ under  SARFAESI
Stamp Duty implicationsStamp duty as per Indian Stamp Act, 1899No 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 TreatmentIncome-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 1961SSF exempted under Section 10(23FBA) Income is taxable directly in the hands of the investors under Section 115UB
Due DiligenceRBI-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:

  1. Scheduled Commercial Banks (except RRBs)
  2. All India Financial Institutions
  3. Small Finance Banks
  4. 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:

  1. Calculate the outstanding balance of each loan
  2. Divided this figure by total outstanding balance of the portfolio on the origination cut-off date
  3. Square the figures obtained
  4. Calculate the total sum of these squares
  5. 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
     
L1100L1/B0.10638297870.01131733816
L2120L2/B0.12765957450.01629696695
L3130L3/B0.13829787230.01912630149
L4150L4/B0.15957446810.02546401086
L5110L5/B0.11702127660.01369397918
L690L6/B0.095744680850.009167043911
L780L7/B0.085106382980.007243096424
L8160L8/B0.1702127660.02897238569
 
Total outstanding balance of the portfolio (B)940 Sum of S0.1312811227

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,

  1. Re-securitisation exposures
  2. Exposures to other lending institutions
  3. Refinance exposures of AIFIs
  4. Farm Credit
  5. Education Loan
  6. Accounts identified as Fraud/Red Flagged Account, and
  7. 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:

  1. Personal loans and business loans to individuals; and Loans to Micro Enterprises, not exceeding ₹50 Crore and,
  2. 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

  1. 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.

  1. 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

  1. Should not be a person disqualified under Section 29 A of IBC;
  2. Should not be a related party of the originator;
  3. Should not support losses of SPV except to the extent contractually agreed upon;
  4. Should remit all cashflows as per agreed terms;
  5. During interim period from cash collection to remitting to SPE, collections to be made in escrow account;
  6. 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
  7. ReM to adhere to guidelines of FPC issued by RBI

Comparison of SSA, TLE and Proposed SOSTRA Framework

 SSA frameworkTLE frameworkProposed SOSTRA framework
Loans not in defaultPermittedPermittedNot permitted
DPD 1-89 days (Classified as Standard)PermittedPermittedPermitted upto 10% of the pool size
DPD 1-89 days (Classified as NPA)Not permittedPermittedPermitted
DPD > 90 daysNot permittedPermittedPermitted
Intent of the originatorLiquidity, capital relief etcLiquidity, capital relief, off-balance sheet, concentration reliefNPA clean up
Intent of the investorYieldInorganic book buildingYield
MRRRequiredNot requiredNot required
MHPRequiredRequiredNot required
Credit EnhancementCan be providedCannot be providedCan be provided
Liquidity FacilityCan be providedCannot be providedCan be provided

[1] Availabe at: https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1402

Banks drive Securitisation volumes to all-time high

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– 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.

Securitisation is complicated, burdened with 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

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De-jargonizer: Understanding key terms in Securitisation structures

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– 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

  1. 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.

  1. 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.
  1. 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. 

  1. 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]

  1. 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.

  1. 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.

  1. 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,

  1. 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.

  1. 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

  1. Write-Ups and Reports 
  1. Youtube Videos 
  1. Regulatory representations and Advocacy 

Union Budget 2025: Key Highlights and Reforms focusing on Financial Sector Entities

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