Long-term positives of RBI's securitisation guidelines outweigh concerns: CRISIL

The Reserve Bank of India (RBI) released the final guidelines governing the securitisation of performing assets last week. CRISIL believes that these guidelines will:

The final guidelines break new ground on several issues, and could, in CRISIL's opinion, prove to be the building blocks of a more robust and vibrant securitisation market in the country. According to Ramraj Pai, head, structured finance ratings at CRISIL: "The final guidelines provide a robust regulatory and institutional framework for the orderly development of the market in the medium term."

Although the market might be affected in the short term by issues like higher capital allocation, prohibition of upfront profit recognition, and some ambiguity in the status of past transactions, CRISIL believes that there is ample scope for growth once the market realigns itself to the new regulatory framework.

Structurally, CRISIL sees the norms on capital allocation for credit enhancements actively driving originators towards mezzanine strips; this will in turn lead to the emergence of a new class of investors in non-AAA subordinate securities. Increased clarity on several pending regulatory issues will also spur several new investors to become active in the market. In sum, therefore, over the medium term, CRISIL continues to remain positive on the prospects for the securitisation market, despite reduced operational and structural flexibility for the market participants, and the expectation of subdued market conditions in the immediate future.