What Is Securitization?

SECURITIZATION– Prior to June21st, 2002 when the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was enacted, banks and financial institutions had to enforce their security through courts for the recovery of their advances. The process was slow and time consuming. Moreover, hypothecation, the charge against which majority of advances is granted by banks, had no provision in any law. The SARFAESI Act takes care of these issues.

Securitization is the process of acquisition of Non- Performing Assets(NPA) portfolio of a bank or a financial institution by Securitization or Reconstruction Company on mutually agreed terms and conditions as regards sale or transfer price, with or without recourses, transfer or sale etc. Bank gets price in the form of cash or debentures/ bonds as mutually agreed upon. This process provides the banks and FIs a summary procedure for recovery of their secured dues which have been classified as NPA in their books, by setting up of Securitization and Reconstruction Company for taking over the defaulted loans.

Securitization or Reconstruction company may be raising funds for acquisition from their own resources or from the Qualified Institutional Buyers by issuing security receipts representing undivided interest in the financial assets or otherwise. The security receipt is transferable in the market. SARFAESI Act, thus makes the secured NPA portfolio of a bank transferable.

The SARFAESI Act empowers the secured creditor (Bank/ FI) as under, if the borrower and or guarantor defaults:

• To take possession, sell or lease the secured assets (prior to this, a notice has to be served to the borrower/ guarantor; to clear dues within a time period of 60 days).
• Take over the management of the business or appoint a manager.
• Instruct any person at any time, who holds secured assets of the borrower and from whom any money is due or becoming due to the borrower; to pay such money to the bank (secured creditor).
• To initiate action in Debt Recovery Tribunal.

In case of consortium or multiple lending arrangement, if 60% of the secured creditors in value, agree to initiate recovery action, it will be binding on all secured creditors.

Loans not covered under SARFAESI Act

(1) Loan with outstanding amount up to Rs, 1 lac.

(2) Sale of agriculture land.

(3) The amount due (principal together with interest) is less than 20%.

(4) Loans secured by charge of pledge and lien.

(5) Loan where the limitation period is expired.

(6) Loans where the security is not charged to bank.

Read more at: SARFAESI ACT, 2002- Applicability, Objectives

Important Provisions and terms in SARFAESI Act

• “Asset reconstruction” means acquisition by any securitization company or reconstruction company, of any right or interest of any Bank/ Financial Institution (‘FI’) in any financial assistance for the purpose of realization of such financial assistance.
• “Bank” includes all banks- Nationalized, RRBs, Co-operative etc. and any such banks which the Central Government may by notification, specify for the purpose of this Act, and also FIs.
• “Borrower” is any person who has been granted financial assistance by bank/ FI, who has given guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank/ FI. It also includes a person who becomes borrower of a securitization company or reconstruction company consequent upon acquisition.
• “Central Registry” means the registration office set up by the Central Government for the purpose of registration of all the transactions of asset securitization, reconstruction and transactions of creation of security interests. The registration system operates on the priority of registration basis- person who registers first  gets priority over the one who registers later.
• “Default” means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of the borrower is classified as non-performing asset in the books of secured creditor.
• “Financial Assistance” means any credit facility extended by bank or FI such as loan or advance granted , debentures or bonds subscribed, guarantee given, letter of credit established etc.
• “Financial Asset” means any debt or receivables including-

a. Secured or unsecured claim to any debt or receivables.

b. Any debt or receivables secured by mortgage or charge on immovable property.

c. A mortgage, charge, hypothecation or pledge of movable properties.

d. Any right or interest in the security, whether full or part underlying such debt or receivables.

e. Any beneficial interest (existing, future, accruing, conditional or contingent) in the property, whether movable or immovable, or in such debt, receivables.

f. Any financial assistance.

• “Hypothecation” means a charge in or upon any movable property, existing or future, created by the borrower in favour of a secured creditor without delivery of possession of the moveable property to such creditor, as a security for financial assistance and includes floating charge and crystallization of such charge into fixed charge on movable property.
• “Non- performing Asset” means an asset or account of a borrower; which has been classified by a bank or FI as sub-standard, doubtful or loss asset in accordance with the directives or guidelines relating to assets classifications issued by RBI.
• “Property” means –

a. Immovable property.

             b. Movable property.

             c. Debt or right to receive payment of money, whether secured or unsecured.

             d. Existing and future receivables.

             e. Intangible assets- know-how, patent, copyright, trademark, license, franchise or                   any other business or commercial right of similar nature.

• “Qualified Institutional Buyer” (QIB) means a FI, insurance company, bank, state financial corporation, state industrial development corporation or a foreign industrial investor registered under SEBI Act.
• “Reconstruction Company” means a company formed and registered under Companies Act for the purpose of asset reconstruction.
• “Securitization” means acquisition of financial assets by any securitization/ reconstruction company from any originator; whether by raising of funds by such company on its own or from QIB by issue of security receipts representing undivided interest in such financial assets or otherwise.
• “Securitization Company” means any company formed and registered under Companies Act for the  purpose of securitization.
• “Secured Asset” means the property on which security interest is created.
• “Secured Creditor” means any Bank or FI or any consortium or group of banks or FIs, including- debenture trustee appointed by any bank or FI or securitization company or reconstruction company.
• “Secured Debt” means a debt which is secured by any security interest.
• “Security Interest” means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment.
• “Security Receipt” means a receipt or other security, issued by a securitization company or reconstruction company to any QIB pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitization.

Central Registry of Securitization Assets Reconstruction and Security Interest of India (CERSAI) has been established as a company under Section 8 of the Companies Act, 2013.

Transactions to be registered are- securitization and asset reconstruction, all mortgages, securities hypothecated, security interest in intangible assets, security interest in under- construction buildings.

The registration should be done within 30 days of transaction. Permission of Central registrar is required if 30 days delay thereafter. For further delay the permission of Central Government is required.

Banks can take possession of only those securities in respect of which the charge is registered with CERSAI. Banks will have priority of recovery over Government dues where charge is registered with CERSAI.

RBI guidelines on sale of NPAs

• At least once in a year- preferably in the beginning- banks shall identify and list internally specific financial assets identified for sale.
• Board should review, at a minimum, all assets classified as ‘doubtful’, above a threshold amount.
• The invitation for bids should preferably be publicly solicited using e-auction platform.
• Prospective buyers must be provided at least 2 weeks’ time for due diligence.
• Banks should have policy for valuation of assets. In case of exposure beyond Rs. 50.00 crore, banks shall obtain two external valuation reports.
• The discount rate used in the valuation exercise may be either cost of equity or average cost of funds or opportunity cost subject to a floor of the contracted interest rate plus penalty, if any.

Obligations of selling bank

• Any NPA asset in the books, is eligible for sale.
• Banks shall sell NPAs on ‘without recourse’ basis.
• Only on receiving the entire sale consideration, the asset can be taken out of books.
• The selling bank can re-purchase the NPAs sold by it, only after specified period and only where SC/ RC have successfully implemented the restructuring plan for the NPAs acquired.

Obligations of the purchasing bank

• Estimated cash flows should normally be realized in 3 years period.
• Can not sell purchased NPAs for a minimum period of one year.
• For the first 90 days from the date of purchase the assets will be classified as standard assets. Thereafter it will be based on the recovery.
• The risk weight for the purpose of capital adequacy will be considered 100%.

Read more at: GST ITC REVERSAL IF RECIPIENT FAILS TO PAY TO SUPPLIER WITHIN 180 DAYS