What changed
RBI issued final guidelines on reset of credit enhancement in securitisation transactions, effective July 1, 2013. Previously, resets were not allowed; now, external credit enhancements (e.g., cash collaterals, guarantees) can be reset subject to conditions like re-rating of all outstanding tranches and no rating deterioration since original or previous reset.
What it means for you
Banks and other credit enhancement providers can now free up capital by withdrawing excess credit enhancement after reset, improving liquidity and capital efficiency. However, strict conditions—such as mandatory re-rating and no rating downgrade—ensure investor protection and transaction stability. This aligns Indian securitisation norms with global practices while maintaining risk safeguards.
What you must do
- Review existing securitisation deals to identify external credit enhancements eligible for reset.
- Ensure all outstanding tranches (except equity) are re-rated before initiating a reset.
- Verify that no rating deterioration has occurred since original or previous reset before proceeding.
- Update internal policies and procedures to incorporate RBI's reset conditions and documentation requirements.
- Train relevant staff on the new guidelines and monitor compliance with all conditions.
Who it affects
Scheduled commercial banks (excluding RRBs and Local Area Banks), All-India term lending and refinancing institutions (Exim Bank, NABARD, NHB, SIDBI)
What types of credit enhancement can be reset under these guidelines?
Only external credit enhancements—such as cash collaterals and first/second loss guarantees—provided by a third party or originator in first or second loss position can be reset. Internal enhancements like over-collateralisation or subordinated tranches are not covered.
What happens if a tranche's rating deteriorates after reset?
If any tranche's rating deteriorates compared to its rating at the time of previous reset, subsequent resets are not permitted. The first reset is also barred if any tranche's rating has worsened since the original securitisation.
Does this circular change other securitisation guidelines?
No. All other guidelines on securitisation, including those in the Master Circular on Basel III Capital Regulations dated July 1, 2013, remain unchanged.