The Reserve Bank of India, India’s central banking authority, recently proposed new regulations for securitizations by non-bank finance institutions, which includes microfinance institutions (MFIs). The regulation is motivated by a concern that securitization (the process of packaging individual loans to create a debt security), especially securitization of subprime loans, was one of the factors that caused the recent subprime crisis in the United States. These regulations could have a significant impact as securitization has become a method of funding in India.

The regulations consist mainly of the following: a minimum holding period, which requires the issuer to hold the asset on its own books for a certain amount of time, and a minimum retention, which requires the issuer to retain a certain percentage of any loss on its own books. A minimum holding period restriction could potentially block MFIs from using securitizations due to the typically short term of microloans.

By Jennifer Shevock, Research Associate

About the Reserve Bank of India:
The Reserve Bank of India is India’s central banking authority. The Reserve Bank of India undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in banking fraud, monitor non-performing assets and supervise the rating model for the banking sector.

Sources and Additional Resources:
“The Hidden Risks behind Microfinance Securitization” July 6, 2010. http://www.microfinancefocus.com/news/2010/07/06/the-hidden-risks-behind-microfinance-securitization/

“RBI’s proposed securitisation guidelines: Will microfinance entities be able to bear the blow?” June 8, 2010. http://www.microfinancefocus.com/news/2010/06/08/rbi%E2%80%99s-proposed-securitisation-guidelines-will-microfinance-entities-be-able-to-bear-the-blow/

MICROCAPITAL.ORG STORY: “Braking Securitizations – India’s Economic Times Reports That The Reserve Bank of India Proposes To Ask Originating Banks To Hold Loans On Their Balance Sheets For 6 Months To Stem ‘Reckless Securitizations’ And Suggests That Holding Periods Should Be Tailored For Banks Originating Microfinance Loans” October 23, 2009. http://www.microcapital.org/microcapitalorg-story-braking-securitizations-indias-economic-times-reports-that-the-reserve-bank-of-india-proposes-to-ask-originating-banks-to-hold-loans-on-their-balance-sheets-for-6-months-to/

MicroCapital Universe: Reserve Bank of India: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

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