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RBI announces guidelines for safer securitisation of loans

To ensure that investors in securitised transactions are protected, RBI has directed banks to hold these loans for a minimum period and study their performance before securitising

May 08, 2012 10:19 IST | India Infoline News Service

To ensure banks to provide more loans, the Reserve Bank of India (RBI) has announced guidelines for safer securitisation of loans. According to the central bank,the decision will help banks lend more without raising capital frequently.

The RBI has also mentioned a minimum lock-in period for loans that could be bundled and sold off to investors, and minimum retention criteria, i.e., the portion of the loan that will still be on the books of banks to ensure that the loan originators have their role to play in the game.

The central bank said, “Originators should retain a portion of each securitisation originated, as a mechanism to better align incentives and ensure more effective screening of loans. In addition, a minimum period of retention of loans prior to securitisation is also considered desirable, to give comfort to the investors regarding the due diligence exercised by the originators.”

To make sure that the risk is transferred to investors, RBI has also capped the total exposure of the originator, mostly banks, at 20% of the total securitised portfolio. On the other hand, to ensure that investors in such securitised transactions are protected, RBI has directed banks to hold these loans for a minimum period and study their performance before securitising.

"The criteria governing determination of MHP (minimum holding period) for assets need to ensure that, the project implementation risk is not passed on to the investors and a minimum recovery performance is demonstrated prior to securitisation to ensure better underwriting standards,'' said RBI in its guidelines.

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