Recently, the Reserve Bank of India (RBI) released a draft framework proposing the market-based securitisation of stressed assets.

About Stressed Assets

• Stressed assets are loans where borrowers have defaulted or are likely to default, posing significant risks to lenders’ balance sheets.
• Traditionally, these assets were transferred to Asset Reconstruction Company (ARC) for resolution and recovery.

About the Securitisation of Stressed Assets

• Aim: To create tradable securities from stressed assets, attracting broader investor participation and supplementing the current ARC route under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.
• Under the proposed framework, lenders can sell stressed assets to Special Purpose Entities (SPEs) strictly on a cash basis, with the full sale consideration received at transfer.
• A new class of facility providers, called Resolution Managers (ReMs), will administer the recovery and resolution of these stressed exposures.
• The framework emphasizes prudentially structured, transparent securitisation to promote financial stability and efficient resolution.

Old vs New Mechanism for Securitisation of Stressed Assets

Significance of the RBI Framework

• Deepening the Distressed Debt Market: The framework is set to enhance liquidity and depth in India’s distressed asset market, facilitating better price discovery.
• Boosting Investor Participation: By allowing a broader range of investors beyond ARCs, it promotes competition and attracts diverse capital for asset resolution.
• Strengthening Financial Stability: With transparent and prudently structured transactions, the framework ensures better risk distribution and reduces systemic financial vulnerabilities.

Classification of Stressed Assets as per RBI regulations under the SARFAESI Act

DOWNLOAD PDF