Securitisation of Standard Assets
After the enactment of the Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002, banks have got significant power to possess the securities of defaulting borrower. Banks can now take possession of the assets from borrower and convert the same in Security Receipts. In the process of securitisation, assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV. Securitisation thus follows a twostage process. In the first stage, there is sale of single asset or pooling and sale of pool of assets to a ‘bankruptcy remote’ special purpose vehicle (SPV) in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradabledebt securities. Thus, the non-performing asset of the banker is taken out of the balancesheet of the bank and converted into Security Receipts.
Securitised asset should be derecognised in the books of the bank, if and only if, either by a single transaction or by a series of transactions taken as a whole, the bank loses control of the contractual rights that comprise the securitised asset. The bank loses such control if it surrenders the rights to benefits specified in the contract. Determining whether the bank has lost control of the securitised asset depends both on the bank’s position and that of the SPV. Consequently, if the position of either the bank or the SPV indicates that the bank has retained control, the bank should not remove the securitised asset from its balance sheet.
For enabling the transferred assets to be removed from the balance sheet of the originator in a securitisation structure, the isolation of assets or ‘true sale’ from the originator to the SPV is an essential prerequisite. In case the assets are transferred to the SPV by the originator in full compliance with all the conditions of true sale, the transfer would be treated as a ‘true sale’ and originator will not be required to maintain any capital against the value of assets so transferred from the date of such transfer. The effective date of such transfer should be expressly indicated in the subsisting agreement. In the event of the transferred assets not meeting the “true-sale” criteria, the assets would be deemed to be on the balance sheet of the originator and accordingly the originator would be required to maintain capital for those assets.
These Security Receipts are treated as non-SLR security (Investment) in the books of subscribing bank as per RBI guidelines. In the absence of ready market for the Security Receipts, the subscribing bank needs to value Security Receipts on the basis of Net Asset Value to be declared by Securitising Company on a quarterly basis. Further, when a bank sells the non-performingassets to securitising company, if the sale value of assets is less than the Net book Value, i.e., books value of advances less provisions, the shortfall needs to be debited to Profit & Loss Account. However, in case the sale value being higher, excess provision cannot be reversed and is kept to meet the shortfall/ loss on account of other non-performing assets.