India Ratings and Research (Ind-Ra) opines the Reserve Bank of India’s recently announced master directions for loan transfers and securitisations of standard assets will have no impact on its securitisation rating methodology and thus on the credit ratings of its rated existing securitisation transactions. The agency believes the announcement however impacts the loan assignment and securitisation market, with respect to transaction volumes, product structures and market practices. Ind-Ra notes the following overarching features and expects the consequent impact on the market:
RMBS Issuances Likely to Grow: Ind-Ra
expects the liquidity of residential mortgage loans to improve due to the
favourable revision in the minimum holding period, minimum retention
requirements and credit enhancement (CE) reset conditions. Ind-Ra expects the
residential mortgage backed securitisations (RMBS) volumes to improve as the
loans eligible for securitisation increase and transaction economics get
Securitisation of Single Loan / Acquired Loans Permitted: The transfer and securitisation of single loans and acquired loans are now allowed. Also, structures such as replenishing securitisations and loan participations are allowed. Other than increasing the pool of eligible loans, the agency is of the view that these changes can lead to new use cases of loan transfers / securitisation such as warehousing transactions, complete / partial exit of a single wholesale exposure and long-term securitisation notes with replenishing pool of short-term loans.
Transaction Structures may Adapt to Changes: As overcollateralisation (OC) is no more considered for minimum retention requirement calculation, Ind-Ra opines the market may move towards a structure where there is no / minimal OC and any CE that needs to be provided in a transaction would predominantly be in the form of cash collaterals and originator’s investment in the securitisation notes. The directions list out risk weights that are favourable for short-tenured senior securitisation tranches relative to long-tenured and non-senior tranches. The same may disincentivise multiple tranche transactions with credit or time tranching. Also, the agency believes capital optimisation and consequent favourable transaction commercials may motivate market participants to achieve the simple transparent comparable (STC) tag for transactions rated in the high investment grade category, where the relative preferential treatment is significant.
Revised Holding Period may not Reflect
The minimum holding period has been revised to consider the number of months
elapsed, rather than the earlier norm of the number of instalments collected.
Also, the holding period commences from the date of registration of security
interest for loans where security can be registered. Clarity may be required on
the definition of such a registration date for mortgage and non-mortgage loans.
Also, in case the underlying loans have quarterly / semi-annual borrower
payments, loans can be transferred / securitised possibly even with only two or
one instalments being collected. Such loans may not have seen adequate
performance history. Ind-Ra in its assessment would continue to look at
analysing the probability of default for underlying loans in transactions based
on seasoning as per the number of instalments collected.
Due Diligence (DD) gets Critical in Loan Transfers: The focus of the framework is on encouraging prudent transactions where the lender is well aware of the credit risk being exposed to. DD is to be done by acquiror’s own staff with the same rigour as is practiced for self-originated loans. Also, the criticality of diligence for loan transfers has increased as warranties and replacements are restricted to 30 days. Originators can completely exit exposures if the acquirer does DD on all the loans in the pool transferred. Originators may have an incentive in the form of lower/nil retention by enhanced DD and information sharing with the acquirer. Acquirers typically demand originator’s skin-in-the-game and thus the agency believes that the practice of originator retention in loan transfers may continue, although not mandatory, if all the loans in the pool undergo acquirer diligence.
The framework elaborates on the requirements for loan transfers and securitisations including lender’s board policies, loan eligibility, due diligence, documentation / legal opinion requirements, performance monitoring, credit assessments and capital requirements. The prominent changes in the revised framework and Ind-Ra’s views of their impact on the loan markets are elaborated in the agency’s report on Indian Loan Transfer &Securitisation Framework.
Additional information is available at www.indiaratings.co.in.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.