Page 212 - DMGT303_BANKING_AND_INSURANCE

Unit 10: Non-performing Assets

The beneficial interest in the securitized assets are sold/transferred to the SPV (i.e., a trust/ Notes
company/firm) on a without recourse basis.
An option to repurchase fully performing asset(s) at the end of the securitization scheme where
the residual value of such assets has fallen below 10 per cent of the original amount sold to the
SPV (i.e. clean up calls) could be retained by the originator.

Credit enhancement facilities include all arrangements provided to the SPV that could result in
an originator absorbing losses of the SPV/its investors.
A liquidity facility is provided to help smoothen the timing differences faced by the SPV between
the receipt of cash flows from the underlying assets and the payments to be made to the investors.
An originator/third party service provider may act as an underwriter for the issue of securities
by the SPV and treat the facility as an underwriting facility for capital adequacy purposes.
Investment of banks in securities issued by the SPVs would attract all prudential norms applicable
to non-SLR investments prescribed by the RBI. The maximum limit on investment by the
originator in the securities issued by the SPVs is 10 per cent of the original amount of issue. The
income on such securities may normally be recognized on accrual basis. However, if the income
remains in arrears beyond 90 days, any future income should be recognized only on realization.
Appropriate provisioning for the diminution in the value of securitization on account of over
dues should be made as per the RBI norms for classification and valuation of investments by
banks.

Banks can sell assets to an SPV only on cash basis. Any loss on sale should be reflected in the
profit and loss account for the period during which the sales are affected out any profit/premium
should be amortized over the life of the concerned securities.

Self Assessment

State whether the following statements are true or false:
6. Investment of banks in securities issued by the SPVs would not be able to attract all
prudential norms applicable to non-SLR investments prescribed by the RBI.
7. Banks cannot sell assets to an SPV only on cash basis. Any loss on sale should be reflected
in the profit and loss account for the period during which the sales are affected out any
profit/premium should be amortized over the life of the concerned securities.
8. 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.
9. 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.

10. A bank which has to recover any debt should approach the appropriate DRT which would
issue a summon to the concerned borrower to explain within 30 days as to why the relief
should not be granted to the bank.

In order to narrow down the divergences and ensure adequate provisioning by banks, it was
suggested that a bank's statutory auditors, if they so desire, could have a dialogue with RBI's
Regional Office/ inspectors who carried out the bank's inspection during the previous year with
regard to the accounts contributing to the difference.

 Pursuant to this, regional offices were advised to forward a list of individual advances,
where the variance in the provisioning requirements between the RBI and the bank is

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