The Reserve Bank of India (RBI) is looking to provide one more alternative mechanism for lenders to sale bad loans, in addition to the existing asset reconstruction route.

For this purpose, the central bank has released a discussion paper on securitisation of stressed assets framework, highlighting several issues including a regulatory mechanism for special purpose entity and resolution manager.

Securitisation involves the pooling of loans and selling them to a special purpose entity, so that a lender gets liquidity upfront on the assets it has originated.

Till now, securitisation is allowed only in the case of standard loans while lenders have to largely rely on Asset Reconstruction Companies (ARCs) for bad assets.

In the discussion paper released on Wednesday, the RBI has asked a dozen questions for stakeholders to respond before 28 February. In September, the central bank had said it would introduce a framework for securitisation of stressed assets.

"The discussion paper broadly covers nine relevant areas of the framework including asset universe, asset eligibility, minimum risk retention, regulatory framework for special purpose entity and resolution manager, access to finance for resolution manager, capital treatment, due diligence, credit enhancement, and valuation," the RBI said in a notification.

One point of discussion is whether the securitisation of stressed loans should only be limited to non-performing assets (NPAs) or should also include standard assets in the SMA (special mention accounts) category. Loans which are due between zero and 90 days are categorised as SMA.

"Internationally, a limited window is permitted for the inclusion of non-NPA (standard) assets for structuring purposes. However, such transactions having a combination of standard and NPA assets may lead to issues of regulatory arbitrage, complexity in valuation, etc.," the discussion paper said.

The central bank is also seeking comments on which type of assets should be eligible for securitisation like term loans within the same asset universe, big-ticket loans above a certain threshold or small-value loans such as commercial and residential mortgages, loans to MSMEs and unsecured retail assets.

Another question in the paper is on the nature of the resolution manager and the financial incentives given to them. Should they come under the RBI’s purview of regulations? Should the framework completely prohibit any kind of relationship of originator with the resolution manager post transfer of stressed assets or an arm's length relationship may be permitted for a certain period?