The Hindu Business Line : Minimum lock-in period for securitising loans proposed

Mumbai, April 21 The Reserve Bank of India on Tuesday proposed a minimum lock-in period for banks to hold on to their loans, in a bid to prevent them from immediately securitising loans after originating or purchasing from other banks.

The move appears to be aimed at preventing the kind of financial havoc that securitisation wrought on the US market that triggered the current global financial crisis.

In its Annual Policy Statement 2009-10, the central bank has proposed to prescribe a minimum lock-in period and retention criteria for securitising the loans originated and purchased by banks.

Securitisation is the pooling together of loans into standard marketable bonds, which enables banks to go in for leveraged lending. The bonds are subscribed by investors looking for regular income streams. Loans given mainly for housing and auto financing are sold by banks through a special purpose vehicle (SPV), which pools loan products and markets them to investors. The bond holders receive interest, which is paid on the underlying loans.

In its annual statement, the central bank said the securitisation framework in India is considered to be reasonably prudent and has been able to minimise the incentives that have led to the problems which surfaced in the current crisis.

“It has come to the Reserve Bank’s notice that some banks have securitised loans immediately after originating or purchasing these from other banks. Banks are also dividing the total loan for one project into different tranches and securitising a few tranches even before the total disbursement is complete, thus passing on the project implementation risk also to the investors,” RBI said.

It is in the light of this that the central bank proposed to prescribe a minimum lock-in period. The RBI, however, did not specify the lock-in period, stating that it would be announced later.

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