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RBI guidelines may be long-term boost for securitisation

The Reserve Bank of India's (RBI) guidelines on securitisation transactions could promote the long-term growth of the Indian securitisation market, pending clarity on the tax treatment of Pass-Through-Certificates (PTCs), Fitch Ratings says.

Fitch believes that the requirement for a minimum holding period for each loan before it becomes eligible for securitisation would be a credit positive, as this would eliminate first-payment default risk.

The requirement to hold between 5%-10% of the issuance may not represent a dramatic shift for Indian originators who have in any case provided the first-loss credit enhancement in most transactions. But it is likely to result in less use by originators of third-party guarantees for the second-loss credit facility.

The RBI says that banks "should not offer credit enhancements in any form" or liquidity facilities in Direct Assignment deals, where investors are assigned the scheduled cash flows arising from a pool of loans together with the underlying security. Disallowing credit enhancement would make Direct Assignment less attractive for banks, as it would render it effectively impossible to achieve anything other than a very low rating - and also due to the greater due diligence requirement in the new RBI guidelines.

This would potentially reduce volumes in the Indian new issuance market, where Direct Assignment deals have constituted the bulk of activity in recent years. Nevertheless, we believe that a shift back towards PTC issuance via SPVs/Trusts could ultimately boost the Indian securitisation market. In particular, Direct Assignment deals have traditionally been put together for a single investor, because it is difficult for more than one entity to have a charge on a pool of loans simultaneously. A move back towards SPV/Trust-based issuance would make it easier to sell a single deal to multiple investors, and may also lead to a more liquid secondary market for PTCs.

The RBI did not comment on the reset of credit enhancement in securitisation transactions, but has said it will issue a separate circular on the matter. If allowed, this would potentially make PTC issuance more attractive to issuers. Investors also need clarity on the tax treatment of PTCs from the Indian courts, after the tax authorities attempted to tax income earned on PTCs by mutual funds.

The minimum standards set by the RBI for the disclosure of information could have multiple benefits for the Indian securitisation markets, including improved standardisation in information dissemination and transparency, leading to greater investor confidence and a wider investor base. We also expect a boost to investor knowledge of the product from the requirement that investors stress-test their securitization exposures and monitor underlying credit quality.

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