Structured Finance in India: Products, Players and Process
Structured Finance in India: Products, Players and Process
Overview
Structured finance refers to complex financial instruments and arrangements created to redistribute risk and meet specific funding needs that traditional bank loans cannot satisfy. In India, structured finance covers a wide range of products including securitisation, pass-through certificates, asset-backed securities, collateralised debt obligations, lease rental discounting and structured credit facilities.
SEBI regulates the issuance of structured products to sophisticated investors through the AIF framework and the SEBI (Issue and Listing of Securitised Debt Instruments) Regulations. RBI regulates securitisation by banks and NBFCs under its guidelines on transfer of loan exposures and securitisation of standard assets. The market grew significantly after the IL&FS crisis of 2018, which spurred regulatory reforms to improve transparency and investor protection in structured credit markets.
Key participants in India’s structured finance market include public sector banks, large private sector banks like HDFC Bank, ICICI Bank and Kotak, NBFCs, insurance companies, mutual funds and offshore credit funds operating through the FPI route or AIF structures.
Common Structured Finance Products
| Product | Description | Typical User |
|---|---|---|
| Securitisation / Pass-Through Certificate | Pool of loans sold to an SPV which issues certificates | Banks, NBFCs, HFCs |
| Lease Rental Discounting (LRD) | Loan against future lease rentals from commercial property | Real estate companies |
| Structured Credit Facility | Customised loan with layered security and cash flow waterfall | Infrastructure, PE-backed |
| Partial Credit Guarantee | Government or bank guarantee on a portion of a bond issue | NBFCs, MSMEs |
Interest Rates
Structured finance pricing depends heavily on the underlying assets, credit enhancement levels, and the seniority of the tranche. Senior tranches of securitised paper can be priced at 8% to 10% while junior or mezzanine tranches command 14% to 20% or more to compensate for higher risk.
Eligibility
- Originators of securitisation must retain a minimum risk retention (MRR) of 5% to 10% as per RBI guidelines
- SPV must be a bankruptcy-remote special purpose vehicle
- For LRD, the property must have long-term registered lease agreements with creditworthy tenants
- Structured credit facilities require strong underlying cash flows and layered security
- Investor eligibility is restricted to qualified institutional buyers (QIBs) and accredited investors for most structured products
Documents Required
- Pool data file containing details of underlying loan assets for securitisation
- Rating letter from a SEBI-registered credit rating agency
- Trust deed and SPV formation documents
- Servicer agreement defining collection and payment obligations
- Legal opinion on bankruptcy remoteness of the SPV
- Placement memorandum for investor distribution
Application Process
Step 1: Structure Design
Work with an investment bank or structured finance arranger to design the transaction. Define the pool of assets, tranche structure, credit enhancement (overcollateralisation, subordination, cash collateral) and waterfall mechanism.
Step 2: Rating
Get the instrument rated by CRISIL, ICRA, CARE or India Ratings. Senior tranches typically target AAA or AA ratings to attract mutual fund and insurance investors.
Step 3: Regulatory Filing
File with SEBI or comply with RBI guidelines as applicable. Banks and NBFCs must ensure compliance with RBI’s securitisation master directions.
Step 4: Investor Placement
The arranging bank places the rated securities with institutional investors including mutual funds, insurers, family offices and credit funds.
Step 5: Settlement and Ongoing Reporting
Funds flow to the originator on settlement date. The servicer manages monthly collections, reporting and distribution to investors through the SPV trustee.
Frequently Asked Questions
What is the role of a trustee in structured finance?
The trustee holds the assets transferred to the SPV on behalf of investors, ensures the waterfall operates correctly and takes enforcement action if the servicer defaults. SEBI-registered debenture trustees typically serve in this role.
Can retail investors buy structured finance products?
Most structured products in India are restricted to institutional investors like mutual funds, insurance companies, banks and AIFs. Retail investors can indirectly access this market through debt mutual funds that invest in securitised paper.
What happened to structured finance after the IL&FS crisis?
After the IL&FS collapse in 2018, investor confidence in structured credit fell sharply. RBI and SEBI tightened regulations, mandated more disclosures, increased MRR requirements and pushed for better credit assessment. The market has since stabilised with higher standards.
