Investment by banks in Mortgage Backed Securities- Lending to Priority Sector
RBI has decided to classify the investment made by banks in the mortgage backed securities (MBS) under direct lending to housing within the priority sector lending, provided it satisfies the following conditions: -
1. The pooled assets are in respect of direct housing loans which satisfy the definition for inclusion under the priority sector;
2. The securitised loans are originated by the housing finance companies/banks; and
3. The mortgage backed securities (MBS) should satisfy the following conditions
(a) The right, title and interest of a HFC in securitised housing loans and receivables thereunder should irrevocably be assigned in favour of a Special Purpose Vehicle (SPV) / Trust.
(b) Mortgaged securities underlying the securitised housing loans should be held exclusively on behalf of and for the benefit of the investors by the SPV/Trust.
(c) The SPV or Trust should be entitled to the receivables under the securitised loans with an arrangement for distribution of the same to the investors as per the terms of issue of MBS. Such an arrangement may provide for appointment of the originating HFC as the servicing and paying agent.
However, the originating HFC participating in a securitisation transaction as a seller, manager, servicer or provider of credit enhancement or liquidity facilities :
i) shall not own any share capital in the SPV or be the beneficiary of the trust used as a vehicle for the purchase and securitisation of assets. Share capital for this purpose shall include all classes of common and preferred share capital;
ii) shall not name the SPV in such manner as to imply any connection with the bank;
iii) shall not have any directors, officers or employees on the board of the SPV unless the board is made up of at least three members and where there is a majority of independent directors. In addition, the official(s) representing the bank will not have veto powers;
iv) shall not directly or indirectly control the SPV; or
v) shall not support any losses arising from the securitisation transaction or by investors involved in it or bear any of the recurring expenses of the transaction.