Notes:

What is Securitisation? Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. Assets that can be securitised or long-term receivables like housing loans, short term receivables like credit card dues, existing physical current assets like stocks, future receivables like ticket sales, credit card payments, car rentals or any other form of future receivables.

For the purpose of distinction, the conversion of existing assets into marketable securities is known as asset-backed securitisation and the conversion of future cash flows into marketable securities is known as future-flows securitisation.

How to Securitise?

Ø  Creation of asset pools based on criteria like demographics, performance history, literacy levels, etc.

Ø  Filtering of pool to exclude unacceptable items and rate the acceptable ones.

Ø  Apply optimistic criteria to filtered results. Optimistic criteria include regulatory considerations, risk management requirements, income augmenting motives etc.

Ø  Next consideration is size of the pool for minimum scale economies and cost covering considerations.

Ø  Pooling from geographical locations.

Steps in Securitisation Transaction:

(i)            Creation of a Special Purpose Vehicle (SPV) to hold the financial assets underlying the securities.

(ii)          Sale of the financial assets by the originator or holder of assets to the special purpose vehicle, which will hold the assets and realise the assets.

(iii)         Issuance of securities by the SPV to investors, against the financial assets held by it.

This process leads to the financial asset being taken off the balance sheet of the originator, thereby relieving pressures of capital adequacy, and provides immediate liquidity to the originator.

Benefits of Securitisation:

(i)            Shifting of credit risk from banks to other players.

(ii)          Liquidity risk is reduced because there is no need to refinance the loan.

(iii)         Net interest income of bank is replaced by fee income which helps the banks to augment non-cyclical revenues.

Meaning of Default as per Section 2(1)(j): "default" means— (i) non-payment of any debt or any other amount payable by the borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor; or (ii) non-payment of any debt by the borrower with respect to debt securities after notice of ninety days, demanding payment of dues served upon such borrower, by the debenture trustee or by any other authority in whose favour security interest is created for the benefit of holders of such debt securities;

Non-Performing Asset: Non-Performing Asset (NPA) has been defined in a simple way by the Reserve Bank of India in Master Circular-Prudential Norms on Income Recognition, Asset Classification (IRAC) and Provisioning pertaining to Advances dated 1.7.2015 as:

“An asset including a leased asset, when it ceases to generate income for the bank”

The detailed guidelines are as follows:

NPA is a loan or advance where:

a.    Interest and/or instalment of principal remains overdue for a period of more than 90 days in respect of a Term Loan

b.    The account remains out of order in respect of Overdraft/Cash Credit accounts.

c.    Bill remains overdue for a period of more than 90 days in case of bills purchased and discounted.

d.    Instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops.

e.    Instalment of principal or interest thereon remains overdue for one crop season for long duration crops.

f.     Amount of liquidity facility remains outstanding for more than 90 das, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated 1.2.2006.

g.    In respect of derivative transactions, the overdue receivables representing positive marked to market value of derivative contract if these remain unpaid for a period of more than 90 days from the specified due date for payment.

For MSME borrowers registered under GST subject to fulfilment of certain conditions, additional time period of 90 days is permitted over and above the 90 days mentioned above.

NPAs on account of temporary deficiencies:

Ø  In case of non-submission of stock statements, if the drawing power is calculated from stock statements older than 3 months would be deemed as irregular. The account will become NPA if such irregular drawings are permitted for a continuous period of 90 days even though the unit may be working or the borrower’s financial position is satisfactory.

Ø  An account where regular/ad hoc credit limits have not been reviewed within 180 days from the due date/date of ad hoc sanction will be treated as NPA.

Some more guidelines

Ø  NPA is identified only with respect to its record of recovery and not with respect to the availability of security.

Ø  Bank management and Statutory Auditors hold the primary responsibility for NPA identification and provisioning.

Ø  NPA has to be identified only with respect to a date and not with respect to month-end, quarter-end or year-end, unless otherwise stated in the RBI guidelines. In effect, NPA identification is real-time and cannot be deferred to close of month, quarter or year.

Ø  NPA classification is borrower-wise and not facility-wise.

Ø  Where there are potential threats for recovery due to erosion in value of security or non-availability of security and existence of other factors like frauds committed by borrowers, it can be straightaway classified as doubtful or loss asset without going through sub-standard asset stage.

Ø  Advance against term deposits, NSC, KVP, Indira Vikas Patra, Life Policies etc. need not be treated as NPAs, provided adequate margin is available.

Ø  In case of staff loans where principal is adjusted first from the instalment, interest need not be considered as overdue from first quarter onwards.