New Mechanism For Securitisation Of Stressed Assets

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.

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.

Aspect	Existing ARC Route	Proposed Market-Based Securitisation
Legal Framework	SARFAESI Act, 2002	RBI’s new draft framework
Type of Buyers	Primarily ARCs	Broader investor base, including institutions
Structure	Sale to ARCs with reconstruction focus	Sale to SPEs; securities issued to investors
Payment Mode	Often includes deferred payments	Strictly cash-based transactions
Asset Management	ARCs manage and recover assets	Resolution Managers (ReMs) oversee recovery

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.

Category	Definition	Key Criteria
Standard Assets	Assets that do not disclose any problems and which do not carry more than normal risk.	Regular repayment of principal and interest; no overdue beyond 90 days.
Sub-Standard Assets	Assets that have remained non-performing for a period less than or equal to 12 months.	Overdue for more than 90 days but less than or equal to 12 months.
Doubtful Assets	Assets that have remained in the sub-standard category for a period of 12 months or more.	Remained NPA for more than 12 months.
Loss Assets	Assets where loss has been identified by the bank or external auditors or the RBI, but the amount has not yet been written off wholly.	Considered uncollectible and of little value; not yet written off.
Non-Performing Assets (NPA)	Loans or advances where interest and/or installment of principal remains overdue for a period of more than 90 days.	Includes sub-standard, doubtful, and loss assets.
Special Mention Accounts (SMA)	Assets that show signs of incipient stress and risk of becoming NPAs. Categorized into SMA-0, SMA-1, and SMA-2 based on days of overdue.	SMA-0: 1–30 days overdue SMA-1: 31–60 days overdue SMA-2: 61–90 days overdue

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