RBI Proposes Relaxation in MHP for Mortgage-based Securities

The Reserve Bank of India (RBI) has publicised the draft framework for the securitisation of standard assets. The framework proposes to go easy on the minimum holding requirements for mortgage-backed securities. It also speaks about modifying the definition of ‘securitisation’ such that it applies to single-asset transactions as well. 

The Central Bank stated that only those transactions leading to multiple tranches of securities, which reflect various credit risks would be treated as securitisation transactions and covered under the guidelines. The regulator also stated that they are aiming to develop a reliable and efficient securitisation market in India and to incentivise more straightforward securitisation structure. 

The revision of guidelines is made simply to align the regulatory framework with the Basel guidelines that have come to effect from 1 January 2018. Also, the revision has taken the recommendations of the committee on improving the housing finance securitisation market in India. The committee was set up by RBI in May 2019.

In the latest draft of the framework allows the securitisation of exposures bought from other lenders. A fundamental change in the guidelines refers to the differential treatment for residential mortgage-backed securities (RMBS) as compared to the other securitisations concerning prescriptions regarding reset of credit enhancements, minimum holding period (MHP), and minimum retention requirements (MRR).

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When it comes to residential mortgages against which the special purpose entity issues RMBS, the MHP applicable will be either six months or a period comprising six instalments, whichever is later. The MRR relevant here will be 5% of the book value of the loans.

A quantitative test for transferring credit risk has been prescribed for derecognising the purpose of capital requirements, independent of accounting derecognition. Two capital measurement approaches were proposed in line with Basel III guidelines; they are Securitisation – External Ratings-based Approach (SEC-ERBA) and Securitisation – Standardised Approach (SEC-SA). 

Also, a special case of securitisation was prescribed with well-defined criteria and preferential capital treatment—Simple, Transparent, and Comparable (STC) Securitisations.

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in