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Call for papers – Wadia Ghandy Award for Structured Finance Research, 2024

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For more information regarding the 12th Securitisation Summit –

The Promise of Predictability: Regulation and Taxation of Future Flow Securitization

Dayita Kanodia | Executive | finserv@vinodkothari.com

The most reliable way to predict the future is to create it

Abraham Lincoln

Surely, Lincoln did not have either  securitisation  or predictability in mind when he wrote this motivational piece; however, there is an interesting and creative use of securitisation methodology, to raise funding based on cashflows which have some degree of predictability.  In many businesses, once an initial framework has been created, cashflows trickle over time without much performance over time. These situations become ideal to use securitisation, by pledging this stream of cashflows to raise funding upfront. Surely, traditional methods of on-balance-sheet funding fail here, as there is very little assets on the balance sheet.

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Decoupling from direct assignments, Indian securitisation moves the global way

– Vinod Kothari, Director | vinod@vinodkothari.com

The data for securitisation transactions in India for the first half of FY24 are just out, and some remarkable features are:

  • Sharp growth – nearly 40% on YoY basis, to cross Rs 100000 crores H1FY24.
  • Proper securitisations, that is, PTC transactions, register almost 90% growth
  • Direct assignment volumes may further reduce relatively, post the merger of HDFC into HDFC Bank
  • Asset-backed securities as an asset class increased share from 45% in FY 23 to 53% in FY 24.

With this, securitisation markets in India have truly started moving towards maturity. The so-called direct assignment/DA (now under regulations termed as Transfer of Loan Exposures) was a market aberration and was a convenient way for lenders to shift priority sector loan exposures. During the half year, the impact of the HDFC Ltd-HDFC Bank merger might have had some impact; it will see more impact going forward, as the bulk of the DA business was accounted for by the erstwhile duo. Further, co-lending has emerged as a very convenient alternative to direct assignments.

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Workshop on Cashflow modelling and structuring Securitisation and pool transfers

Register Here: https://forms.gle/dmzuWFjxp8sL3VR4A
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Security Interest: Meaning, forms, registration, enforcement, and effects of non-registration

-Team Vinod Kothari and Company | resolution@vinodkothari.com

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Taxation in Securitisation: A judicial overview

-Anirudh Grover, Executive | finserv@vinodkothari.com

Introduction

Securitization transactions in India post the pandemic has seen significant improvement with volumes growing by 70% to Rs. 73000 crores in FY 2023 compared to Rs. 43000 crores in FY 2022.[1] This growth was also highlighted in one of our recent write up wherein it can be seen from the data laid down that despite the global slowdown in the world economy on account of the pandemic, the volume of securitization transactions in India gained a lot of popularity. Given the impetus of this fundraising mode, it is important to have a vibrant securitization market. This can be only achieved if the governing framework with respect to taxation does not impose an additional taxation burden on the parties. Through this article, the writer will be reviewing the stance of various courts by highlighting the principles with respect to the taxation of the parties involved in a securitization framework i.e. Originator, Special Purpose Vehicle(‘SPV’), and the Investors. For a better understanding of the framework of securitization, the readers can also refer to our Article on Securitization: A Primer.

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Securitisation: Indian market grows amidst global volume contraction

Timothy Lopes, Manager

finserv@vinodkothari.com

Global Securitisation Volumes, 2022

The global securitisation market in 2022[1] saw a decline in volumes as compared to record issuance volumes seen in the year 2021. The decline was mainly driven by 24% year-on-year decline in volumes in the United States, obviously because of inflation, general economic conditions and low level of business confidence,  coupled with supply chain disruptions and uncertainty caused by the Russia-Ukraine conflict[2].

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SVB Collapse: Focus on risk of MBS investing

-Vinod Kothari and Timothy Lopes

finserv@vinodkothari.com

It all started after Silicon Valley Bank (‘SVB’) announced its Q1’23 Mid quarter update[1], revealing that it intended to raise about USD 2.25 billion of capital owing to the fact that it had sold its USD 21 billion ‘Available for Sale’ (‘AFS’) securities portfolio, which consisted of US treasuries and Mortgage Backed Securities (‘MBS’) and suffered a USD 1.8 billion loss.

This caused a run on its deposits that triggered the quick collapse of SVB just two days after this announcement, which is being called the ‘largest bank failure since the global financial crisis’[2]. On March 10, 2023, the SVB Financial Group announced[3] that its wholly owned subsidiary SVB was closed by the California Department of Financial Protection and Innovation and placed under Federal Deposit Insurance Corporation (‘FDIC’) receivership.

Part of the blame is being placed on the investment decisions made by SVB in long term MBS. The Financial Times[4] talks about how crazy it was that SVB did not hedge its Held-to-Maturity (‘HTM’) portfolio which comprised of very long term agency MBS maturing in 10 years or more.

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National financial information repository: One more or one for all?

– Lovish Jain, Executive | lovish@vinodkothari.com

Some days ago, Mr. Vinod Kothari had commented on a LinkedIn post :

“Do we realise how many places does a lender (NBFC, Bank) register information about a loan? There are 4 credit information companies (such as CIBIL) where the credit data, including performance history, is uploaded. If the exposure is Rs 5 crores or above, in the aggregate over the banking system, information goes on CRILC too.

RBI has recently written to NBFCs reminding them of the obligation to register details with NeSL, an information utility under IBC, irrespective of whether the provisions of Code apply (for example in case of individuals), or whether the lender in question is at all contemplating resorting to IBC as a remedy (for example, consumer loans).

If the loan is a secured loan, the details need to be filed with CERSAI. If the secured loan borrower is a company, details need to be filed with RoC too. If the security interest is on immovable property, one needs to file particulars with land registry. If the security interest is on motor vehicles, the hypothecation is registered with Vahan portal too.

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Securitisation of stressed loans: Opportunities and structures

Comments on RBI’s Discussion Paper on Securitisation of Stressed Assets Framework (SSAF) dated January 25, 2023

Timothy Lopes, Manager | Vinod Kothari Consultants Pvt. Ltd.

finserv@vinodkothari.com

Background

At present, in India, there exists a framework for securitisation of standard assets only. in September, 2021 the RBI issued the ‘Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021’ (‘SSA Directions’)[1], 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.

For assets that turn non-performing, i.e., 89+ days-past-due (‘DPD’), including those that retain the classification as the borrower has not been able to clear all his past arrears, the  same can, at present, be sold under the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’)[2], which has a framework for sale of stressed assets (which includes non-performing assets).  Technically, there is a process of “securitisation” of non-performing loans (‘NPLs’), by issuing “security receipts” (‘SRs’) against the same; however, the framework for issue and investing in SRs is quite different, and is normally not captured as a part of securitisation in the industry parlance[3].

Assets sold through the TLE route require a complete arm’s length sale, without any credit support from the seller and there is typically no tranching. This results in substantial haircuts on these stressed loan pools. Further, most of the NPLs that face a problem in the current scenario are retail loans or re-performing loans (see discussion on re-performing loans later). These retail pools are not normally sold under the ARC route since ARCs lack the capability in this specific asset class and are more suited towards wholesale transactions.

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