Securitisation in India: Background and Introduction

Securitisation in India includes the following.

• Traditional securitisation, which is essentially the sale of receivables to a special purpose vehicle which in turns issues securities whose performance is based on the performance of the underlying receivables.
• Portfolio sales, which are the direct sale of loan assets by entities regulated by the Reserve Bank of India (RBI) to other entities regulated by the RBI. The transactions are more colloquially known/termed as “direct assignments” or “transfers of loan exposures”.

An entity that sells receivables in a securitisation is known as an “originator”.

Securitisation is popular in India, and still has great scope to grow. It tends to offer balance sheet relief, in that receivables that have been “sold” are “off balance sheet” for the originator, and do not need to be provided for. For financial sector originators, a securitisation also offers capital relief from an RBI perspective, in that assets that are “sold” are not subject to the provisioning requirements applicable to RBI-regulated entities. Securitisation also provides an avenue for fundraising.

Role of the regulators

The securitisation market is regulated by the RBI (India's banking and monetary policy regulator) and by India's capital markets regulator, the Securities and Exchange Board of India (SEBI).

The RBI regulates all securitisations between financial sector entities that are regulated by it, including banks (both universal banks and other more specialised banks such as small finance banks), non-banking financial companies and housing financing companies (which are also regulated by the National Housing Bank).

SEBI provides a framework for originators to access the securitisation markets through listing. SEBI's securitisation framework applies to RBI-regulated entities and also to originators that are not regulated by any financial sector regulator.

An RBI-regulated financial sector entity must comply with the RBI's directions on securitisation. If a securitisation involving an RBI-regulated financial sector entity is to be listed, then it must also comply with SEBI's regulations.

The RBI's regulatory framework is by way of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 and the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, whereas SEBI's regulatory framework is by way of the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008. Notably, SEBI is in the process of re-evaluating its regulatory framework.

General trend

In a broad brush-stroke, it could be said that India's securitisation market is dominated by RBI-regulated financial sector originators. These originators tend to access the securitisation market both as a source of balance sheet relief and capital relief, and as a source of fundraising. In a departure from global trends, the participation of non-financial sector originators in India's securitisation market is still very nascent. While there is wide scope for the growth of securitisation with non-financial sector originators, this section o

Overview

The securitisation market in India can be described as being somewhat counter-intuitive compared to general trends around the world. For example, while the global trend is to ease into securitisation with secured mortgage loans as the underlying assets, the Indian securitisation market found its impetus in the securitisation of unsecured microfinance loans as the underlying asset. While originators chased balance sheet relief and capital relief, investors were drawn to the securitisation market by yield, essentially packaging this as a fixed income product that could substitute more traditional forms of investment.

Interplay of regulations

Securitisation in India has also been both stymied and driven by sectoral events and quirks of law, including accounting treatment.

Accounting standards versus RBI directions

While Indian accounting standards provide clarity in originators seeking balance sheet relief for financial sector originators with an overall asset size of INR5 billion (approximately USD58.2 million), there is less clarity for larger financial sector originators. While accountants would argue that the accounting standards are clear enough, financial sector originators counter that the misalignment between the RBI's requirements for securitisation and accounting standards for financial sector originators with an overall asset size of INR5 billion is a disincentive (if not an outright drawback) in the further deepening and development of the securitisation market in India. For this reason, larger financial sector originators tend to favour portfolio sales (ie, direct assignments) as they provide both balance sheet relief from an accounting perspective and capital relief from an RBI perspective, and are also a source of fundraising.

MHP and (!) MRR

The Indian securitisation market is also an outlier of sorts in that it adheres to both a minimum retention requirement (MRR) and a minimum holding period (MHP). To clarify, the RBI's securitisation directions – which are applicable only to financial sector originators regulated by the RBI – prescribe that an originator must comply with both MRR (which is retention of risk) and MHP (which is holding on to receivables for a defined period of time before securitising them).

SEBI's securitisation regulations do not currently prescribe MHP or MRR, but this is likely to change soon in view of the ongoing overhaul of SEBI's regulatory framework for securitisation.

Having both MRR and MHP might be perceived as “over-kill”, considering that, globally, securitisation transactions tend to follow either MHP or MRR. The presence of both MRR and MHP might be attributed to the tendency of Indian financial sector regulators to hew to a conservative regulatory framework. For the time being, having both MHP and MRR in a securitisation transaction is a feature that is here to stay.

“Priority sector” classification

The RBI requires banks operating in India (including both domestic banks and also foreign banks with branch operations in India) to lend to the “priority sector”. The “priority sector” refers roughly to those sectors that the RBI believes require credit delivery or enhanced credit access, and encompasses agriculture, economically weaker sections, microfinance, micro, small and medium enterprises, and geographically diverse areas that do not have a branch presence. In many cases, banks simply do not have the branch presence to lend to these sectors or adequately monitor the credit provided to borrowers in these sectors.

To enable banks to meet their “priority sector” lending targets, the RBI's directions to banks allow them to classify investments in securitisation transactions (including portfolio sales) with “priority sector” loans as the underlying assets. The originators for such securitisation transactions (including portfolio sales) tend to be non-banking financial companies, small finance banks and housing finance companies regulated by the RBI.

“Priority sector” lending targets would typically be a function of a bank's asset size, which means that a bank also needs to increase its “priority sector” lending in order to grow. This way, indirectly, the RBI's regulatory framework provides a fillip for the growth of the securitisation market (or at least for the section of the securitisation market where financial sector entities regulated by the RBI are originators).

Product types

As mentioned earlier, Indian financial sector regulators tend to adhere to a conservative regulatory framework. While SEBI's regulations are in the process of being overhauled, the RBI's directions on securitisation (whether in their current or earlier iteration) have been clear on not permitting synthetic securitisations. This means that, while securitisation itself tends to be a cryptic financial product, its more exotic variants (such as CDOs and CDO-squared) are not prevalent in India. The regulatory rationale for this would be to avoid the financial contagion-like effects that occurred in the global financial crisis of 2008, which debatably were also attributed to securitised products and derivatives.

In view of the RBI's directions on securitisation and considering that RBI-regulated originators are significant participants in the Indian securitisation market, the securitised products that are available are, while complex, perhaps less varied than would be available in Western jurisdictions.

Some Recent Trends

Overhaul of SEBI's regulations

SEBI's regulatory framework for securitisation is by way of the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008. The SEBI's regulations do not contain prescriptions on MHP and MRR, and are viewed as a more “liberal” securitisation framework than the RBI's securitisation directions. Notably, the RBI directions require RBI-regulated entities to invest only in securitisation structures that comply with the RBI's securitisation directions.

SEBI constituted a working group in August 2024 to review its regulatory framework for securitisation and, amongst others, align it more closely with the RBI's securitisation directions. After a consultative process that took industry views, practitioners' views and views of other stakeholders into account, the working group submitted its report in October 2024. This was followed by a consultation paper issued by SEBI in November 2024 for public comments. SEBI's consultation paper proposes a closer alignment with the RBI's securitisation directions and seeks to introduce concepts such as a minimum transaction size, a cap on the total number of investors, MRR and certain clarificatory changes.

While the impact of these changes can more properly be ascertained when the final revised regulations are issued, it is safe to consider that the regulatory intent is to move the SEBI regulations on securitisation closer to the RBI's directions on securitisations, and also to encourage more institutional participation.

Innovative structures

While the tendency of Indian financial sector regulators to adhere to a conservative regulatory framework limits options for structural innovations for originators, it does not eliminate them completely. Securitisation of loan receivables tends to carry amortisation and prepayment risks, which translate into redeployment risk for institutional investors such as mutual funds and alternative investment funds. To suit the investment requirements of institutional investors, and to eliminate redeployment risk, in recent times, “replenishment structures” where the principal amortisation proceeds are used to purchase fresh assets within the same securitisation trust. To wit, “replenishment structures” have been around for some time now, but were only formally recognised in the most recent version of the RBI's securitisaton directions.