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Securitisation of Stressed Assets Framework (SSAF)

Reserve Bank of India (RBI) has released the discussion paper on Securitisation of Stressed Assets Framework (SSAF).

What is Securitisation?

‘Securitisation’ means a structure where a pool of assets are transferred by an originator to a special purpose entity (SPE) and the cash flow from this pool of assets is used to service securitisation exposures of different tranches reflecting different degrees of credit risk, where payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the originator.

In simple words, securitisation means a structure where a pool of assets (loans) are transferred (sold) by an originator (lender) to a SPE, who converts this pool of assets into securitisation notes (investable instrument) of different tranches (risk). The return (income) for the investors of securitisation notes is based on the cash flow generated from the securitised pool of asset (loans). 

A well-developed securitisation market can inter alia provide a market-based mechanism for management of credit risk by financial institutions and can help in development of a secondary loan market.

What are tranches?

‘Tranche’ means a contractually established segment of the credit risk associated with an exposure or a pool of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in another segment.

‘Senior tranche’ means a tranche which is effectively backed or secured by a first claim on the entire amount of the assets in the underlying securitised pool.

‘Subordinate tranche’ means any tranche that is junior to the senior tranches.

Securitisation Frameworks

Reserve Bank of India (RBI) had issued the revised framework for Securitisation of Standard Assets (SSA) on September 24, 2021. 

Currently there is no corresponding mechanism for securitisation of non-performing assets (NPAs) through the SPE route. The Securitisation of Stressed Assets Framework (SSAF) is proposed to enable securitisation of NPAs through the SPE route, on the lines of securitisation of standard assets. 

Securitisation of Stressed Assets Framework (SSAF)

Securitisation of Stressed Assets is a financial structure whereby an originator of NPAs sells these to a SPE that funds such an acquisition by issuing securitisation notes. The SPE, in turn, appoints a servicing entity (i.e. Resolution Manager) to manage the stressed assets, typically with a fee structure that incentivises them to maximise recoveries on the underlying loans. Investors are paid based on the recovery from underlying assets, as per the waterfall mechanism depending upon the seniority of the tranches.

Securitisation of Standard Assets (SSA) vs Securitisation of Stressed Assets Framework (SSAF)

 

 Securitisation of Standard Assets (SSA) Securitisation of Stressed Assets Framework (SSAF)
Assets SSA involves securitisation of Standard Assets. SSAF involves securitisation of NPAs.
Certainty of cash flows Higher degree of certainty of cash flows from the underlying pool. Lower degree of certainty of cash flows from the underlying pool.
Credit risk of underlying assets Underlying pool of assets carry lower credit risk. Underlying pool of assets carry higher credit risk.
Investor risk The credit risk associated with the borrower is borne by the investors in securitisation notes. The investors are exposed to the risk that resolution exercise may not generate sufficient recoveries to cover net value of transferred underlying assets.

Discussion Paper on Securitisation of Stressed Assets Framework (SSAF)

The discussion paper broadly covers 9 relevant areas of the framework including –

  1. Asset universe
  2. Asset eligibility
  3. Minimum Risk Retention (MRR)
  4. Regulatory framework with respect to SPE and RM
  5. Access to finance for RM
  6. Capital treatment
  7. Due diligence
  8. Credit enhancement
  9. Valuation


References

Reserve Bank of India. (2021, September 24). 'Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 (Updated as on December 05, 2022)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12165

Reserve Bank of India. (2023, January 25). 'Discussion Paper on Securitisation of Stressed Assets Framework (SSAF)'. Retrieved from https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=21728

Reserve Bank of India. (2023, January 25). 'RBI releases Discussion Paper on Securitisation of Stressed Assets Framework (SSAF)'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=55112


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