Page 211 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes The government may set up a central registry for registration of transactions of securitization/
reconstruction of financial assets and creation of security interest. It may also appoint a central
registrar for registration of such transactions. The particulars of such transactions would be
entered in the central register.
To carry out the provisions of the SARFAESI Act, the RBI has issued guidelines/directions, the
main elements of which are: registration, asset reconstruction, functions of SCs/RCs,
Securitization and prudential norms.

An SC/RC should have a minimum net owned fund of 15 per cent of the total financial assets
acquired by it on an aggregate basis or ` 100 crore, whichever is less. In no case should it be less
than ` 2 crore.
The elements relating to asset reconstruction are acquisition of financial assets, change/takeover
of management/sale or lease of the business of the borrower, rescheduling of debts, enforcement
of security interest, settlement of dues by the borrower and plan for realization.
The guidelines/directions relating to securitization include: issue of security receipts and
disclosures relating to (1) issuers of security receipts, (2) terms of offer and (3) disclosures on
quarterly basis.
The SCs/RCs should maintain a capital adequacy ratio of 15 per cent. The asset classification
should be: (i) standard (ii) NP (i.e., substandard, doubtful and loss). The provisioning for NPAs
are: sub-standard-10 per cent, doubtful-100 per cent on unsecured portion and 50 per cent on the
remaining; loss assets-100 per cent written off/provided for. Income should be recognized on
receipt basis.

The RBI's guidance notes for SCs/RCs relate to the acquisition of financial assets, engagement of
outside agency and sales committee.
Guidelines on sale of financial assets to SCs/RCs and related issues fall into four groups:

1. Assets which can be sold,
2. Procedure for sale including pricing and valuation,
3. Prudential norms relating to provisioning/capital adequacy and exposures for banks, and
4. Disclosure requirements.

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Caution An SC/RC should have a minimum net owned fund of 15 per cent of the total
financial assets acquired by it on an aggregate basis or ` 100 crore, whichever is less. In no
case should it be less than ` 2 crore.
Securitization (of standard assets) is a process by which performing assets are sold to a bankruptcy
remote (i.e., the unlikelihood of the entity being subjected to voluntary/involuntary proceedings)
special purpose vehicle (SPV) against immediate cash payment. It follows a two-stage process:
(1) sale of performing assets to a bankruptcy remote SPV in return for immediate cash payment;
(2) repackaging and selling the security interests representing claims on incoming cash flows
from the asset(s) to third party investors by issuance of tradable debt securities. Exposures of
banks/Fls/NBFCs (i.e., originators) to a securitization transaction/exposure include exposures
to (1) securities issued by the SPV, (2) credit enhancement facility, (3) liquidity facility, and
(4) underwriting facility.

The securitized asset is transferred from the balance sheet of the originator to the SPV as true
sale so that the originator would not be required to maintain capital against the value of the
transferred asset.

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