The Reserve Bank of India's (RBI's) securitisation and asset transfer guidelines are favourable for the structured finance market. Still, it is credit neutral for rated Indian asset-backed security (ABS) transactions because most of the additional items prescribed are already considered in our analysis of existing transactions, says Fitch Ratings.
However, the ratings agency says the asset transfer guidelines halt the current form of covered bond transactions.
According to Fitch, the RBI guidelines push Indian structured finance transactions to have greater transparency, including the mandate for a minimum level of clarity in payment waterfalls and disclosure for items such as early amortisation triggers.
As per the guidelines, trustees and special purpose vehicles (SPVs) in a securitisation should not connect with the originator. Information on credit enhancement resets needs to be disseminated by rating agencies via a press release, and greater clarity was also provided, including disallowing the use of liquidity facilities to cover credit losses or help increase excess spread flow to the originator.
Fitch says RBI also put the onus on originators to provide adequate information to current and prospective investors and prescribed a minimum amount of information to be shared for new transactions and regular monitoring. "The central bank pushed for public sharing of external ratings, disincentivising private ratings in the Indian securitisation market. These measures will help formulate credit views and increase the market depth by giving confidence to new investors," it added.
RBI also mandated features such as service fees being considered senior. Fitch says its analysis already incorporates this as it thinks the fees senior in its cash-flow modelling, as a replacement servicer may not agree to subordinate its fees even if the seller is ready to keep its fees subordinated.
Similarly, the ratings agency says, the guidelines make it clear that the originator cannot bear recurring SPV expenses, which means they will be paid out of the transaction waterfall. This is consistent with Fitch's cash-flow modelling approach, as the transactions' ratings are, typically, delinked from the originators' credit ratings.
The regulator also incentives to move to less complicated transactions, with simple, transparent and comparable (STC) guidelines, more accessible compliance rules, and lower risk weights. RBI also prescribed a minimum level of pool credit factors to be adhered to for STC transactions, such as pool granularity and homogeneity.
Fitch says, "We expect a volume increase for residential mortgage-backed securities and the start of warehousing transactions in India in the medium-to-long term. The central bank is pushing to increase mortgage-backed securitisations by keeping the minimum holding period (MHP) requirement at six months and minimum retention requirement at 5%, which were lowered recently. The resale of loans has been allowed, but with an additional MHP required in the intermediary's books, facilitating warehousing transactions."
In the new guidelines, the MHP calculations' starting point has to be provided as the security registration date in most cases instead of the first payment date, which means new transactions may have lower weighted-average seasoning than before.
According to the ratings agency, the guidelines also made it more expensive to have over-collateralisation than a subordinated tranche held by the originator. "In addition, the guidelines maintain a ceiling of 20% credit enhancement that the originator can provide at transaction closing, which would continue to limit the highest rating achievable by some transactions, in the absence of a mezzanine investor."
The asset transfer guidelines prohibit asset transfer to an SPV, unless it is a securitisation and upfront consideration is received in cash. "This means asset transfers would be difficult for prospective covered bond issuers as the typical consideration from these SPVs is in the form of a guarantee for the covered bonds. This increases the difficulty of structuring covered bonds in their current form," the ratings agency says.