Lenders, i.e. banks and non-banking finance companies, will have to hold loans in their books for a minimum of six months before securitising the loans, provided the loan tenure is more than 24 months.
This was one of the relaxations introduced by the RBI in the draft guidelines on securitisation released on Tuesday. The minimum holding period was 12 months for all loans.
This dispensation has been allowed for loans that have a monthly repayment schedule. For loans that have a quarterly repayment schedule, the minimum holding period continues to be one year, said an official from an NBFC.
Securitisation involves the pooling of assets and the subsequent sale of the cash flows from these asset pools to investors. The securitisation market is primarily intended to redistribute the credit risk away from the originators to a wide spectrum of investors who can bear the risk, aiding financial stability and providing an additional source of funding, said RBI.
In its report, the RBI said that a minimum period of retention of loans prior to securitisation is desirable to give comfort to investors regarding the due diligence exercised by the originators. The RBI also said that banks need to do better due diligence before entering into a securitisation contract.
In its report, the RBI said, “The recent crisis in the credit markets has called into question the desirability of certain aspects of securitisation activity as well as of many elements of the ‘originate to distribute' business model, because of their possible influence on originators' incentives and the potential misalignment of interests of the originators and investors.”