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The Government of India can prescribe Key Performance Indicators for the Public Sector Banks which may encourage secondary sale of loans. The Task Force profusely acknowledge their gratitude to the representatives from Kirkland & Ellis and Varde Partners for sharing their perspectives related to development of secondary market in other countries. The Uniform Loan Delivery Dataset is the common set of data elements required by Fannie Mae and Freddie Mac for loan deliveries. Loan Delivery is a web-based application through which lenders submit loans to Fannie Mae for whole loan sale and MBS Pools.
As and when the credit markets are in position and having a fixed rate of interest are way low, the ones in search of investment income should try even harder as the products are however vastly diversified or one can say hugely varying from each other. Bushman, R.M., 2009, The University of North Carolina at Chapel Hill, Kenan-Flagler Business School and Regina Wittenberg-Moerman, The University of Chicago Booth School of Business , “Does secondary loan market trading destroy lenders’ incentives? No MHP and MRR requirement may be mandated for secondary and subsequent sales of loans purchased through the sales platform in the secondary market.
The total volume of securitisation has grown from ₹23,545 crore in 2006 to ₹266,264 crore in 2019. The growth, especially in the last decade, has been dominated by DA transactions, and PTC share of the total volume in 2019 was just about a quarter. The skew towards DA is even stronger in home loans where less than 10 per cent of the home loan securitisation transactions (~two per cent of all securitisation transactions) by volume are PTC.
Effectively if an FPI must bid for NPAs through one of the few ARCs rather than directly, the number of bidders are reduced to such number of active ARCs. In order to widen the horizon of participants, both standard and non-performing loans may be permitted for sale under the secondary market. Any re-schedulement, restructuring or re-negotiation of the terms of the underlying agreement/s effected after the transfer of assets to the buyer, shall be binding on the buyer and not on the selling bank except to the extent of MRR. The transfer of assets from selling bank must not contravene the terms and conditions of any underlying agreement governing the assets and all necessary consents from obligors should have been obtained. In the context of Indian law, where no borrower consent requirement is expressly prescribed, the transfer of contractual rights and obligations would not require borrower consent.
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It also discourages some investors who lack capabilities to take over servicing in the event the originator fails. Presently, banks are primarily using securitisation to acquire loans that qualify as priority sector loans. For home loans, those that are below the size threshold defined by the RBI (currently ₹35 lakh in metro areas, and ₹25 lakh in other areas) meet the priority sector criteria. HFCs, especially those that focus on the affordable segment originate such loans and sale pools of them to banks.
Currently, a tiny fraction of PTCs issued through securitisation are listed. Regulatory requirements of listing have been streamlined and the costs of listing are also negligible. Thus, the reluctance to listing is clearly not due to onerousness of procedures or costs. The main reason is that presently most of the securitisation transactions are bilateral deals between the originator and the investor who do not see much value from listing. The securitization market is primarily intended to redistribute the credit risk away from the originators to a wide spectrum of investors who can bear the risk, thus aiding financial stability and provide an additional source of funding. Further, to ensure orderliness of the market and alignment of the interests of the originators and the investors, Minimum Holding Period and Minimum Retention Requirement have also been prescribed.
The current housing finance market in terms of value and numbers of houses has two divergent segments in terms of value and numbers. The total value of housing finance is large in the high-value segment that has relatively low numbers of houses while the very large number of houses in the informal or low-value housing tend not to command large market value. The total value of housing in India is estimated to be ~₹150 lakh crore, which is far greater than the market capitalisation of equity markets. Housing continues to remain one of the largest investment avenues for the citizens of India. Investors—patrons of CDO—embrace insurance corporations, mutual fund firms, unit trusts, funding trusts, industrial banks, funding banks, pension fund managers, private banking organizations, different CDOs and structured funding autos.
By financial year 2019 total home loans outstanding in the banking system were ~₹11.5 lakh crore, representing around 58 per cent of the total home loans outstanding. HFCs, on the other hand, had outstanding home loans of ₹8.5 lakh crore, around 42 per cent of the total home loans. Around 2005, because the CDO market continued to develop, subprime mortgages began to exchange the diversified shopper loans as collateral. By 2004, mortgage-backed securities accounted for greater than half of the collateral in CDOs.
Nature of the Bespoke CDOs
For this purpose, banks should establish formal procedures appropriate and commensurate with the risk profile of the purchased loans. Such procedures should be as rigorous as that followed by the bank for portfolios of similar loans directly originated by it. In case of an overnight rate, FBIL is publishing both MIBOR and Market Repo Overnight Rate . While MIBOR is calculated using the NDS Call transactions, the MROR is calculated using basket repo transactions reported to CCIL. While MIBOR is unsecured and represents the credit risk of banks, the MROR is a near risk free rate due to its backing of Government securities.
Furthermore, as two private parties agree on the contract, it is susceptible to counterparty risk. This risk refers to the possibility or rather the danger of one of the parties defaulting on the derivative contract. This comes in with a high price of an investor left with an option to sell off a financial asset that is way too difficult for understanding as well as selling it off even at lower prices. Just if the investors wish to enlarge it, the said or mentioned risk of the bet with respect to the goat cheese industry, a dealer who can form a Bespoke CDO to get that done at the most appropriate amount. ICICIdirect.com is a part of ICICI Securities and offers retail trading and investment services. ICICIdirect is a registered broker through which you can place orders to buy JM Financial Ltd Share.
- Synthetics “referenced” money CDOs, replacing interest funds from MBS tranches with premium-like funds from credit score default swaps.
- Credit enhancement can be of two types – external or internal.
- A Closing Disclosure is a five-page form that provides final details about the mortgage.
- This is about the longest polarisation phase that I have experienced and if this reverses the reversal should be a sharp one.
The SRB may then work out the eligibility criteria for accreditation of various market intermediaries like facility agents, security trustees, investment bankers, arrangers, law firms, valuation agencies, etc. The purchasing banks need to monitor on an ongoing basis and in timely manner the performance information on the loans purchased and take appropriate action required, if any. Action may include modification to exposure ceilings to certain type of asset classes, modification to ceilings applicable to originators etc.
The approaches to compute capital requirement are ordered into hierarchies with internal rating based approach being the first choice, followed by external rating based approach and standardised approach. The models for determining credit risk transfer are also very sophisticated that require exhaustive data on various parameters of the securitisation transaction. RBI guidelines demand the originator retains a certain minimum amount of the interest in asset pool that is securitised to ensure that it has a ‘skin in the game’ bespoke tranche opportunity and continue to efficiently service the pool as a servicer. As elaborated in Chapter 4, most jurisdictions, including those that have more evolved mortgage-backed securitisation markets, limit MRR to five per cent and there are further concessions to go below this level depending on the characteristics of the pool . It may be useful to link the MRR to the risk profile of the underlying pool and the securities that are issued. Such a risk based MRR would ensure that there is continued sharing of the risk by the originator.
Bank lending to HFCs generally has a maturity of less than five years. Balancing these attractive features, home loans also present some challenges for the lenders. The most important challenge is posed by the long maturity of these loans. Most home loans have maturity of 15 to 20 years at the time of origination. For younger borrowers, the maturity can go up to 25 or even 30 years. While prepayments are quite common, even after adjusting for prepayments, home loans have a maturity of 8 to 10 years making them the longest maturity assets for banks and HFCs.
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In view of the foregoing, the Task Force recommends the following forms of transfer mechanisms in the proposed secondary market for corporate loans to transfer the loan from the seller to the buyer. A deal ticket containing the term sheet to be issued both by the designated official of the buyer and the seller shall be independently confirmed by another designated official of the same two parties. This is a usual practice in international markets to avoid execution of unauthorized deals. Post negotiations, the parties shall confirm intention to complete the transaction by execution of a term sheet followed by final transfer documentation.
A gradual approach means that the market finds a different way to function, and may not be able to adjust to a new financial product later. Under the Dodd–Frank Wall Street Reform and Consumer Act, 2010 the Consumer Financial and Protection Bureau issued the ‘Ability to Repay ’ and ‘Qualified Mortgage Rule’ norms in January 2013. Exemption for mortgage-backed securities that are made up of ‘qualified residential mortgages’ exclusively.
Alternately, investors investing through a jurisdiction, which has a tax treaty with India, may be able to claim exemption from Indian tax on the grounds that PGB is not taxable in India since the Investor does not have a permanent establishment in India. Thus, there is a possibility of widely divergent tax outcomes is which is not desirable. Since the EIS revenue would be booked in the year of securitisation, the book profits of the originator in the year of securitisation would be enhanced without a corresponding increase in the HFC’s profits for tax purposes. This could result in the HFC originator being subject to Minimum Alternate Tax (‘MAT’) based on its book profits. Since banks are not adopting IndAS this issue will not arise if a bank is the originator, thus creating an uneven playing field.
Advantages of Collateralized Debt Obligation (CDO)
The process of transfer by novation effectively cancels the existing lender’s obligations and rights under the loan, while the new lender assumes identical new rights and obligations in its place. The contractual relationship between the transferring lender and the parties to the credit facility agreement ceases and the new lender enters into a direct relationship with the borrower, the agent and the other lenders. At the time when the new lender becomes a party to the facility agreement, the loan could be either fully or partially drawn, if it is a term loan facility.
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One of the steps is to mandate a 5 per cent credit risk retention, so that the sponsor has skin in the game. The US is an important case study as it highlights possible pitfalls that led them into the 2008 global financial crisis . They are also a good study for the changes that were made post-2008, on the back of which, the market for MBS has revived.
The transfer by way of novation may be effected by the execution of appropriate documents and must provide for transfer of rights and liabilities. The approach of novation would be most relevant in case of transfer of non-fund based facilities. The other specific issues in respect of due diligence and confidentiality aspects have been discussed in subsequent chapters. Supervisory data of the RBI indicates that 96,303 borrowers have an aggregate credit exposure of ₹5 cr and above from the banking system, with 266 of them having an aggregate exposure of ₹5000 cr or above. Regulatory stipulations since allow banks to transfer the borrowal accounts from one bank to another subject to certain safeguards. In addition, before taking over an account, the transferee bank should obtain necessary credit information from the transferor bank.
The Korean model is in some ways similar to the early years of the development of the MBS market in the US, which benefited from the support of GSEs like Fannie Mae. The government and Bank of Korea wholly provided the capital for the corporation. KHFC is a government owned entity, about one-third owned by Bank of Korea, and about two-thirds owned by the government. While the overall securitisation volumes have grown strongly in the last few year, the growth was driven largely by DA transactions. PTC’s are less than a third of the overall securitisation volume. In the financial year 2019, which saw very strong growth in securitisation, primarily driven by liquidity challenges in the NBFC / HFC segment, only about a quarter were PTC transactions.
It can provide a platform for lenders – banks and HFCs – to make collaborative efforts at developing standards. NHB can then act as a custodian of the standards and ensure adherence to it as a part of its supervisory role. Investments of provident funds and insurance companies are governed by the guidelines issued by EPFO and Insurance https://1investing.in/ Regulatory and Development Authority of India . Current provident funds guidelines that were issued through a notification in May 2015, permit investments in MBS for funds. MBS are includes in a class of ‘Asset backed, Trust Structured, and Miscellaneous’ investments and an overall limit of five per cent is imposed on this class.