Skip to main content

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


Follow at - Telegram   Instagram   LinkedIn   Twitter

Labels:

Comments

Post a Comment

Popular Posts

Trade Receivables Discounting System (TReDS)

Reserve Bank of India (RBI) has issued the directions on Trade Receivables Discounting System (TReDS). What is TReDS? TReDS is a technology platform on a digital or electronic network for facilitating factoring of trade receivables through multiple financiers. What is a Factoring Unit? Factoring unit refers to trade receivable in the form of invoice / bill uploaded either by the seller (in the case of factoring) or by the buyer (in case of reverse factoring), as the case may be. Who are the participants in TReDS? Seller – Micro, Small and Medium Enterprise (MSME) Buyer – any person liable to the seller, whether under a contract or otherwise, against an invoice or bill of exchange, to pay any trade receivable Financier – all entities / institutions permitted to undertake factoring business under the Factoring Regulation Act, 2011 Insurance companies  Credit Guarantee Fund Trust notified by the Government of India Who can operate TReDS platforms? An entity shall seek authorisation fr...
Post a Comment
Read more

Payment of Agency Commission to Agency Banks (ABs) and Disbursement of Government Pension by ABs

Reserve Bank of India (RBI) has issued guidelines on the conduct of Government business by Agency Banks (ABs), payment of agency commission to ABs and disbursement of Government pension by ABs. Who are ABs? ABs mean all Public Sector Banks (PSBs), scheduled Private Sector Banks (PVBs), scheduled Payments Banks (PBs), and scheduled Small Finance Banks (SFBs) appointed by the RBI under Section 45 of the RBI Act, 1934, by mutual agreement, to carry out Government banking business of the Central Government (CG) / State Governments (SGs). What is agency commission? Agency commission means the remuneration paid by the RBI to an AB in consideration of it acting as an agent of the RBI in the conduct of general banking business of the CG and the SGs at the places and in the manner specified in the agreement between the RBI and the bank, with the exception of the functions relating to the management of the public debt. What are the guidelines on appointment of ABs? Any eligible bank which intend...
Post a Comment
Read more

Kisan Credit Card (KCC) Scheme

Reserve Bank of India (RBI) has issued directions on Kisan Credit Card (KCC) Scheme. To whom are the directions applicable? The directions are applicable to the following entities – Commercial Banks (excluding overseas branches of Indian banks) Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) Central Co-operative Banks (CCBs) To which loans shall the directions be applicable? The directions shall be applicable to loans sanctioned under the KCC Scheme with effect from January 01, 2027.  What are the crop seasons? Crop season means the period up to harvesting and marketing of the crops raised. Short duration crops shall mean crops with anticipated period from sowing to marketing up to 12 months. Long duration crops mean crops which are not short duration crops. The crop season for long duration crops i.e., anticipated period from sowing to marketing is more than 12 months and up to 18 months. For the purpose of the KCC...
Post a Comment
Read more

Credit Derivatives

Reserve Bank of India (RBI) has issued directions on credit derivatives. What is Credit Derivative? Credit derivative means a derivative contract whose value is derived from the credit risk of an underlying debt instrument or an index of underlying debt instruments. What is Credit Default Swap (CDS) and Total Return Swap (TRS)? Credit Default Swap (CDS) means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Total Return Swap (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-d...
Post a Comment
Read more

Lead Bank Scheme (LBS)

Reserve Bank of India (RBI) has issued guidelines on the Lead Bank Scheme (LBS). Who is a Lead Bank? RBI designates a commercial bank as Lead Bank in each district, to coordinate the efforts of the banks, Government, National Bank for Agriculture and Rural Development (NABARD) and other stakeholders at the district level to improve credit flow to the priority sectors and promote financial inclusion in the district. 12 public sector banks and 2 private sector banks (Jammu & Kashmir Bank and ICICI Bank) have been assigned lead bank responsibilities, covering 778 districts across the country. What appointments are made under the LBS? Every lead bank shall appoint a Lead District Manager (LDM) in each district where it has the lead bank responsibility, to exclusively oversee and coordinate the implementation of the LBS in the district. NABARD shall appoint a District Development Manager (DDM) for each district to act as a liaison between NABARD and the district-level banking and financ...
Post a Comment
Read more