Securitization in India

Managing Capital Constraints and Creating Liquidity to Fund Infrastructure Assets

Jennifer Romero-Torres, Sameer Bhatia, Sural Sudip

• Publisher: Asian Development Bank
• Year: 2017
• Print ISBN: 9789292579838
• eBook ISBN: 9789292579845
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

India needs to spend close to Rs43 trillion (about $646 billion) on infrastructure through to 2022. Such a staggering requirement cannot be met though traditional sources such as public sector bank loans. India must immediately explore and quickly ramp up financing from alternative investment sources. This report provides an overview of infrastructure financing in India, sheds light on the challenges faced by the country's banking sector, suggests an optimal mechanism for securitizing the infrastructure assets of public sector banks, and outlines a range of scenarios and factors that must be in place for this mechanism to be successfully realized.

Appendix 1
Criteria for Securitization in India

Reserve Bank of India’s Guidelines on Securitisation of Standard Assets

Criteria to be met by SPV

“8.

[Special-purpose vehicle (SPV)] is set up during the process of securitisation to which the beneficial interest in the securitised assets are sold or transferred on a without recourse basis. The SPV may be a partnership firm, a trust or a company. Any reference to SPV in these guidelines would also refer to the trust settled or declared by the SPV as a part of the process of securitisation. The SPV should meet the following criteria to enable the originator to treat the assets transferred by it to the SPV as a true sale and apply the prudential guidelines on capital adequacy and other aspects with regard to the securitisation exposures assumed by it. 8.1 Any transaction between the originator and the SPV should be strictly on an arm’s-length basis. Further, it should be ensured that any transaction with the SPV should not intentionally provide for absorbing any future losses. 8.2 The SPV and the trustee should not have resembling names or imply any connection or relationship with the originator of the assets in their title or name. 8.3 The SPV should be entirely independent of the originator. The originator should not have any ownership, proprietary interest, or beneficial interest in the SPV. The originator should not hold any share capital in the SPV. 8.4 The originator shall have only one representative, without veto power, on the board of the SPV, provided that the board has at least four members and independent directors are in the majority. 8.5 The originator shall not exercise direct or indirect control over the SPV and the trustees, and shall not settle the trust deed. 8.6 The SPV should be bankruptcy remote and nondiscretionary. 8.7 The trust deed should lay down, in detail, the functions to be performed by the trustee, its rights, and obligations, as well as the rights and obligations of the investors in relation to the securitized assets. The trust deed should not give the trustee any discretion in the manner of disposal and management or application of the trust property. To protect their interests, investors should be empowered in the trust deed to change the trustee at any point in time. 8.8 The trustee should perform trusteeship functions only in relation to the SPV, and should not undertake any other business with the SPV. 8.9 The originator shall not support the SPV’s losses, except under the facilities explicitly permitted under these guidelines and shall also not be liable for the recurring expenses of the SPV. 8.10 The securities issued by the SPV shall compulsorily be rated by a rating agency registered with the Securities and Exchange Board of India (SEBI), and such publicly available rating shall at no time be over 6 months old. For the purpose of rating and subsequent updating, the SPV should supply necessary information to the rating agency in a timely manner. Commonality and conflict of interest, if any, between the SPV and the rating agency should also be disclosed. 8.11 The SPV should inform investors in the securities issued by it that the securities are not insured, and that they do not represent deposit liabilities of the originator, the servicer, or the trustees. 8.12 The SPV should make available to the Reserve Bank of India a copy of the trust deed and the SPV’s accounts and statement of affairs, if required to do so.”

Appendix 2
Basel III Risk Weights

Table A2.1: Basel III risk Weights

Asset	Risk Weight
Investments in government securities	0%
Claims on foreign sovereigns	0%–100%, depending on credit rating
Claims on public sector entities	20%–100%, depending on credit rating
Claims on commercial banks: (i) For investment in equity shares of banks wherein less than 10% of the outstanding shares are held by the investing bank (ii) For investment in equity shares of banks wherein less than 10% of the outstanding shares are held by the investing bank	125% 250%
Investment in bank bonds	20%
Claims on foreign banks	20%–50%, depending on credit rating
Claims on corporates	20%–100%, depending on credit rating
Individual housing loans	50%–75%, depending on the book value
Commercial real estate loans	100%
Claims on venture capital funds, which are considered high-risk exposures	150%
Treatment of securitization exposures
Credit enhancements with first-loss positions	1,111%
Exposure of “B+” rating and below, unrated exposures	1,111%
Securitization exposures that do not meet the Reserve Bank of India’s securitization guidelines	1,111%

Source: Reserve Bank of India.

Table A2.2: risk Weights for Securitization Exposures (%)

Source: Reserve Bank of India.

Table A2.3: risk Weights for commercial real Estate Securitization Exposures (%)

Source: Reserve Bank of India.

Appendix 3
Detailed Analysis of the Regulatory Framework

An overview of the regulations studied under this exercise is provided in Table A3.1.

Table A3.1: regulatory Framework Overview

Participant	Regulatory Authority	Regulations or Guidelines
Originators
Banks or nonbanking financial companies (NBFCs)	Reserve Bank of India (RBI)	Guidelines on securitization transactions: section A on 7 May 2012, pursuant to paragraph 107 of the Monetary Policy Statement 2012–2013
Investors
Banks	RBI	Master circular: Cash reserve ratio and statutory liquidity ratio, 2014
Insurance funds	Insurance Regulatory Development Authority (IRDA)	Insurance Regulatory and Development (Investment) (Fifth Amendm...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Contents
• Figures and Tables
• Foreword
• Acknowledgments
• Abbreviations
• I. Introduction
• II. Infrastructure Financing in India
• III. Banking Sector in India
• IV. The Securitization Market in India
• V. Securitization of Infrastructure Assets in India
• VI. Value Analysis and Success Factors
• Conclusion
• Appendixes
• About the Authors
• Back Cover