While it seems RBI has put a lot of thought since the September 2011 guidelines theFinal Guidelines may just leave the market cold
The much awaited and talked about securitisation guidelines have been published by the Reserve Bank of India (RBI) on 7 May, 2012 (Final Guidelines). The world has been spitting venom on the structured finance instrument and calling it names for causing the recent financial crisis the world has witnessed. Taking cues from the changes in the regulations globally, the RBI also introduced changes to the existing guidelines. The first draft of the securitisation guidelines were released in April 2010, two years back and the next draft in September 2011 causing brouhaha amongst the market players.
The September 2011 draft guidelines made the market sceptic that the guidelines will bring an end to direct assignments ushering an era of 'structured' finance in essence and spirit. The guidelines have considered the causes of financial crisis and have attempted to take early action in India-streamline the markets. However, while attempting to tighten the noose on the market, more often than the regulations backfire and the intent gets lost completely.
The takeaways from the Final Guidelines are the following:
Minimum Risk Retention requirement and Minimum Holding Period requirement:
The current guidelines have tried to address the problems of originate-to-distribute model by requiring originating banks to ensure seasoning of loans in their books before they are being securitised. This would ensure that the banks adhere to firm underwriting standards while originating the loans in their books. Another popular jargon, which is also is a by-product of the recent global meltdown; "skin in the game" also ensures that banks retain some risk in the securitised portfolio by way of minimum risk retention requirement. As is the trend globally, the originators are required to have their skin in the securitisation transactions to ensure that the investors' interests are protected throughout the term of the instrument by having originators equity in the transaction. While the earlier draft guidelines asked for the minimum risk retention (MRR) requirement and minimum holding period (MHP) requirement based on the term of the underlying, the Final Guidelines factor the repayment frequency and the tenor. This may seem like a breather in case of microfinance loans as otherwise if the earlier drafts were making it difficult for microfinance loan receivables to be securitised, shunning this mode of refinancing for the industry completely.
However the Final Guidelines state the criteria for determining the minimum holding period as the loan pool demonstrating minimum recovery performance to ensure good underwriting standards and that it should not pass the project implementation risk to the investors. The purpose of securitisation is to diversify the risk. Risk in securitisation is passed to the investors, but the criteria laid down above are ambiguous. The RBI does not explain what 'minimum' recovery performance it is looking at, this would leave market to have its own norms for minimum recovery performance of the pool before securitising. The MRR requirements are similar to the earlier draft with an addition that in case of bullet repayment loans/ receivables, the risk retained would be 10%.
Booking profits upfront:
While the February 2006 guidelines required profits to be amortised over the life of the securities issued, the Final Guidelines allow the recognition of cash profits arising out of securitisation profits adjusted against the marked-to-market losses suffered by the originator due the exposure in the securitisation transaction. Booking of upfront profits, that is the sale consideration exceeding the carrying value of the assets, is in line with international practices and is favorable.
Are direct assignments going to dry out?
The February 2006 guidelines did not cover direct assignments and led to market moving from PTC structure to bilateral sales. The September 2011 draft guidelines almost strangulated the existence of direct sales, however in our view, the final guidelines seem to have provided a breather here. As per the 2011 draft guidelines in case of direct assignments, banks were not allowed to offer credit enhancements and liquidity facilities and the risk retention was pari passu with that of the transferee making direct assignments impossible.
In the Final Guidelines, the MRR requirements are not explicitly stated to be pari passu to the transferee's investment and RBI has left ambiguity here. In the Final Guidelines, RBI required banks to obtain a legal opinion which would indicate the "legal validity" of the interest retained and the opinion would confirm that the arrangement is not interfering with the risks and rewards associated with the loans to the extent transferred to the assignee and that the originator is not retaining any risk and reward associated with the loan transferred.
The Final Guidelines however require the banks to retain some skin in the game. The risk retention requirement is a percentage of the transferred asset. If by way of a legal opinion, the originator needs to confirm that the transferee's risks are protected, it is nothing but a credit enhancement provided in the garb of MRR requirement. Where risk is protected, rewards automatically get protected.
True Sale Criteria
While the guidelines have explicitly provided for ring fencing of the assets from the creditors even in the event of bankruptcy of the originator; the substance of the transaction will only be put to test before the judiciary to determine the claw-back. As we have witnessed in the past most securitisation transactions have not fulfilled the true sale criteria before the courts of law and have faced the re-characterisation risk , so while the concern is well addressed, the remedies are not.
Securitisation exposures not permitted:
The earlier guidelines had outrightly rejected securitisation in case of 1) re-securitisation of assets, 2) synthetic structures and 3) revolving structures. However in the Final Guidelines it seems RBI has expressed intent to revisit their appropriateness in due course. In our view, there is no rationale behind barring synthetic structures and it may take quite a while, before RBI revisits these guidelines.
Further, we have been holding the view that though revolving structures have not been permitted, the intent of RBI is to ensure that where the borrower is under a line of credit, such as credit card receivables and cash credit facilities, such receivables should not be securitised. However, in case where there are loans with repayments by way of EMIs (equated monthly instalments) and loans are sold on regular basis and the exposure limits do not vary such as in case of microfinance loan pools, the intent may not be to prohibit revolving structures. There seems to be ambiguity here as well, but for the benefit of the market progressing we assume that RBI'd stance on this would be more supportive than restrictive.
Lastly, the Final Guidelines explicitly prohibit clean-up call options as in the RBI's views it tantamounts to repurchase of assets. However the need for clean-up call options is commercial viability of the transaction more than re-purchase of assets and is more of a commercial call than a regulatory dictate. This in our view is totally irrational and unthoughtful.
On the whole, while it seems RBI has put a lot of thought since the September 2011 guidelines, neither are the Final Guidelines benign nor malignant. The Final Guidelines may just leave the market very neutral for acceptance.
(The author can be contacted at [email protected])
Central Information Commission, acting on a RTI appeal filed by Delhi-based activist Subhash Agrawal, ordered that for the sake of transparency, “all the information relating to the allotment, occupation and use of the bungalow at 6, Krishna Menon Marg, should be brought out in the public domain”
The Central Information Commission (CIC), today directed the urban development ministry to disclose information related to allotment, occupation and use of a government bungalow by family members of late Indrani Devi, including her daughter and Lok Sabha Speaker Meira Kumar, in public domain. Earlier, the government has waived around Rs1.98 crore of pending rent owed by Ms Kumar for using palatial bungalow at 6 Krishna Menon Marg, revealed an application filed under the Right to Information (RTI) Act.
The direction came while hearing the RTI appeal filed by Delhi-based activist Subhash Agrawal who sought information on the occupation, allocation and use of the said bungalow.
Central Information Commissioner Satyananda Mishra observed that, “As submitted by the Appellant during the hearing, he had been receiving often contradictory response/information from various authorities concerned regarding this bungalow and its use. He showed us several replies received from the Directorate of the Estates, CPWD and others which, instead of throwing clear light on the issues, confused the entire matter.”
It ordered that, “For the sake of transparency, it is extremely important that all the information relating to the allotment, occupation and use of this bungalow should be brought out in the public domain.”
The CIC has directed the ministry to furnish the information along with all relevant files and correspondence within 20 working days. It has also directed to put all information related to the bungalow 6, Krishna Menon Marg, on its website, possibly within two months. This will enable citizens to access the relevant information freely.
In November 2011, the RTI query filed by Mr Agrawal had revealed that the Speaker has been served a Rs2 crore bill for illegally occupied bungalow. (Lok Sabha Speaker owes govt Rs2 crore as unpaid rent)
In 2004, Ms Kumar was allotted the bungalow number 6 at Krishna Menon Marg after she became the Union minister of social justice & employment. The same residence was the house of her father and senior Congress leader Babu Jagjivan Ram till his death in 1986. Ms Kumar was allotted another bungalow, number 20 on Akbar Road when she became the Speaker in 2009 and where she currently lives.
However, according to the news reports, Ms Meira continued to hold both these bungalows. A statement from the Speaker’s office had said that the family members of late Indrani Devi had vacated the Krishna Menon Marg bungalow by November 30 2002, and this was intimated to the CPWD (Central Public Works Department), NDMC (New Delhi Municipal Council), director of estates and other authorities. It is also reported that the bungalow has been turned into a memorial for Babu Jagjivan Ram.
Further, in reply to another RTI application filed by Mr Agrawal, the DoE said that, “…a bill of Rs1.98 crore was issued in the name of family of Late Smt Indira Devi in respect of 6 Krishna Menon Marg. However, subsequently on receiving a clarification from Smt Meira Kumar, Hon’ble Speaker, stating that she has vacated 6 Krishna Menon Marg on 28-11-2002, a decision has been taken by the ministry to treat this as the date of vacation and as per orders the recovery notice was withdrawn.”
A research conducted by the University of Bergen, Norway, revealed that Facebook addiction occurs regularly among younger than older users. It was also found that people who are anxious and socially insecure use Facebook, probably because they find it easier to communicate via social media than face-to-face
Women are more likely to develop Facebook addiction while ambitious people are at less risk, reveals a new research conducted in Norway. While many of us would accept to be hooked on social media, chances of Facebook being the most addictive networking site are high. And to measure this increasing trend of Facebook addiction, Norway-based researchers have developed a new instrument named the Bergen Facebook Addiction Scale.
Cecilie Schou Andreassen, doctor of psychology, who is heading this first of its kind research project-Facebook Addiction-at the University of Bergen, Norway (UiB), explains, "It occurs more regularly among younger than older users. We have also found that people who are anxious and socially insecure use Facebook more than those with lower scores on those traits, probably because those who are anxious find it easier to communicate via social media than face-to-face."
Ms Andreassen adds, "People who are organised and more ambitious tend to be less at risk from Facebook addiction. They often use social media as an integral part of work and networking."
The research also found out that women are more prone to Facebook addiction and the symptoms of Facebook addiction are similar to those of drug addiction, alcohol addiction, and chemical substance addiction.
According to the research, Facebook addiction was related to extraversion. People with high scores on the new scale further tend to have a somewhat delayed sleep-wake rhythm.
The Bergen Facebook Addiction Scale, developed at the UiB, Faculty of Psychology, in collaboration with the Bergen Clinics Foundation (Norway), is based on six basic criteria:
All the six items are items are scored on the following scale- 1 for Very Rarely, 2 for Rarely, 3 for Sometimes, 4 is for Often, and 5 for Very often.
Ms Andreassen's study reveals that scoring of 'Often' or 'Very Often' on at least four of the six items may suggest that you are a workaholic.
In January 2011, 423 students-227 women and 196 men-participated in tests for the Bergen Facebook Addiction Scale. UiB in a release said that, "The scale can facilitate treatment research, clinical assessment and can be used for the estimation of Facebook addiction prevalence in the general population worldwide."