RBI plans to make India subprime proof

22 Apr 2009, ET Bureau

KOLKATA: The US subprime crisis is still very fresh in every policy maker’s mind. And Reserve Bank of India (RBI) governor D Subbarao is no exception. It is now also well known that the relaxed loan securitisation practice in the US was one of the key factors behind the subprime blues that eventually led to the global financial disorder.

To immunise the local system further from possible securitisation-led trouble, RBI has now prescribed a minimum lock-in period and minimum retention criteria for securitising loans originated and purchased by banks.

This means banks are now barred from selling the assets immediately after the creation or acquisition of assets. Aggressive banks in India, especially private players, used to securitise loans immediately after originating or purchasing these from other banks. RBI has observed that banks are also dividing the total loan for one project into different tranches and securitising a few tranches even before the total disbursement is complete, thus passing on the project implementation risk also to the investors.

RBI has made an attempt to correct this by prescribing the lock-in period. The banking regulator is, otherwise, of the view that the country’s securitisation framework is reasonably prudent and has been able to minimise the incentives that have led to the problems, which surfaced in the current crisis.

In step, RBI has also relaxed the norms for matured asset reconstruction companies (ARCs), which have completed five years. According to RBI, ARCs will now enjoy more time for recovering the bad assets they bought from banks or other lenders. The banking regulator has proposed to extend the timeframe to seven years for recovering the financial assets. Earlier, it was stipulated that ARCs complete the process within five years from the date of acquisition of the financial assets.

In its policy stance, RBI has proposed “to give an extension of two more years for realisation of the assets in respect of the security receipts issued by securitisation companies and reconstruction companies, which have completed five years.”

This move is, however, an interim one. The banking regulator said that it has received suggestions from various quarters to relax the timeframe. “Requests for extending the timeframe in this regard are being examined.” While the final policy guidelines are being put in place, ARCs will enjoy this benefit in the interim.