Introduction
India’s banking sector grapples with a persistent challenge: non-performing assets (NPAs) that lock up capital and hinder economic growth. Securitisation, the process of converting these bad loans into tradable securities, offers a potential solution by spreading credit-recovery risk among investors. With gross NPA ratios still high, can a market-based securitisation framework finally free banks from the burden of bad debts?The issue is critical. India’s traditional NPA resolution system, reliant on Asset Reconstruction Companies (ARCs) under the SARFAESI Act, 2002, is faltering. ARCs are limited by capital constraints. They’ve shifted from large corporate NPAs to smaller retail loans, often taking steep haircuts that leave banks with losses. Meanwhile, insolvency processes and debt tribunals face delays, forcing public banks to set aside tens of thousands of crores quarterly for loan losses. This burdens taxpayers, as banks’ balance sheets remain clogged with unresolved NPAs. With overall bad-loan ratios (Gross NPAs) still running high, a new market-based route, as contemplated under the draft proposal by RBI dated April 9, 2025 has the potential to certainly help free up the long tied up public funds and improve credit flow in the market.A market-based securitisation framework, as proposed by the RBI, could break this cycle. By transforming NPAs into securities, it aims to attract fresh capital, freeing up public funds and boosting credit flow. This approach addresses systemic inefficiencies, offering banks a new route beyond the capital-constrained ARC model. This article examines how securitisation can reshape India’s NPA crisis. It aims to highlight the potential for securitisation to unlock capital and reduce the taxpayer burden and provide a fresh perspective on turning a financial challenge into an opportunity for innovation.

Salient Features of the Draft Directions
RBI has correctly identified the need for a market-based securitisation option to effectively address the issues faced by the banks and FIs with respect to their stressed assets.

1. The draft applies to all Scheduled Commercial Banks (excluding RRBs), all-India FIs (NABARD, NHB, EXIM, SIDBI, NaBFID), Small Finance Banks and all NBFCs (including HFCs) including overseas branches of Indian banks.
2. The proposed guidelines stated that only pools of stressed loans are allowed, specifically, at least 90% of the pool’s exposure must be non-performing. Pools must be homogeneous: e.g. personal/business loans to individuals and micro-enterprise loans (up to ₹50 Cr) may not be mixed with other loans. Certain assets are excluded altogether, including: (1) Re-securitisation structures; (2) Exposures to other lending institutions (3) Refinance facilities of All-India FIs (4) Farm or education loans; (5)Accounts flagged as fraud/red-flagged or identified as wilful defaults.
3. A qualified ReM (“Resolution Manager”) must be appointed to oversee recoveries. It is stated that the SPV must choose an RBI-regulated entity (bank, NBFC/HFC or ARC) as ReM. The originator can act as ReM only if it retains at least 5% of the notes. For other pools, the SPV may also appoint a permitted financial-sector entity or an insolvency professional as ReM. ReMs cannot be IBC– disqualified or related parties, and must ringfence cash flows (holding collections in escrow). They are allowed to borrow up to 75% of needed resolution funding from non-originator lenders.
4. No fixed 5% mandatory hold is specified. Instead, originators (and/or the ReM) may retain risk by contract. However, the originator’s total exposure to a deal is capped at 20% of the issuance, and any retained interest above 10% is treated as a first-loss tranche for prudential capital purposes.
5. Transfers must be bona fide cash sales. The originator must receive the entire purchase price upfront before removing loans from its books. To promote fairness, banks must adopt an internal price- discovery policy and obtain two independent valuation reports for the pool.
6. Only regulated lenders may buy these securitisation notes. Investors must follow RBI’s standard due- diligence norms for securitisations. For small-loan pools (Para 6(a)), due diligence can be on a one- third sample of the pool (by number and value) if the originator retains ≥10% of the notes. Otherwise, full loan-level and borrower information must be made available.
7. The draft places great emphasis on transparency. Originators must report each securitisation and note issuance to RBI quarterly. Offer documents must disclose loan-level data, cashflows and stress-test assumptions. Servicers/ReMs must provide quarterly performance updates to investors. Originators’ annual accounts must disclose securitised assets and retained exposures.
8. Securitisation notes carry capital charges based on a new Recovery-Rating (RR) scale. Each pool is assigned RR1–RR5 (RR1 = highest expected recovery >150%; RR5 ≤25%). Senior tranches face risk weights from 105% to 1250%, and subordinate tranches 310%–1250% (e.g. an RR4 senior tranche = 505%; any RR5 note = 1250%).

These draft guidelines aim to deepen India’s distressed-debt market by giving banks a market-based exit for their vintage NPAs. As RBI observes, prudentially structured securitizations should “improve risk distribution and exit” from stressed exposures.

Analysis
The RBI’s draft directions on the securitisation of stressed assets represent a significant shift in regulatory thinking. The proposals aim to create a more disciplined market. While many changes are constructive it is imperative to assess the positive breakthroughs as well as the potential pitfalls which may result in operational or structural challenges for stakeholders.A key strength of the directions lies in the wide applicability of the directions. Bringing non-traditional lenders into the regulatory fold improves systemic consistency and also widens participation in securitisation of stressed assets. Additionally, preventing the use of foreign branches to circumvent domestic norms reflects the RBI’s attempt to maintain regulatory oversight regardless of jurisdiction. The 90% cap on NPA levels in securitised pools is expected to prevent window dressing by discouraging excessive transfer of irrecoverable loans. The requirement for homogeneity within asset pools enhances risk transparency and simplifies structuring, benefiting both investors and originators by reducing uncertainty. Loan categorisation into retail/SME and all other loans reflects an understanding of varying risk levels. By segregating large corporate exposures, which tend to be riskier, the framework enables more accurate risk pricing. Excluding refinance, agricultural, education, and fraudulent loans serves to protect structurally vulnerable borrowers and avoids creating layered or cascading risks. The proposed cap-based exposure model limits normal exposure to 10%, after which high capital charges apply to first-loss tranches. This curbs excessive risk retention and reinforces the principle that first-loss tranches, regardless of legal form, behave like equity. This approach incentivises prudence among originators and prevents misuse of the “skin in the game” narrative to attract investors under false pretences.The 20% hard ceiling on maximum exposure retention ensures that even risk-capable originators do not exceed safe exposure levels. The introduction of true sale requirements i.e.upfront cash, verified sales and mandatory valuation. These significantly enhance transparency. Mandating board-approved valuation methods and two external valuation reports helps ensure asset pricing is realistic and aligned with market value, limiting the risk of overvaluation. Investor protection is further supported through mandatory loan-level disclosures and quarterly performance updates. This improves transparency and allows for ongoing risk monitoring. The introduction of Resolution Managers (ReMs), with eligibility linked to Section 29A of the IBC, aims to bring professionalism and independence into recovery processes. Despite these improvements, several proposals could pose difficulties. The capital charge of up to 1250% for mezzanine and junior tranches may severely limit investor interest in these segments, reducing market liquidity and narrowing investment options. The 10% threshold before first-loss capital charges kick in could strain the capital adequacy of smaller banks and NBFCs, discouraging them from engaging in securitisation. The 20% ceiling on total exposure, while risk-sensitive, may also limit structuring flexibility for originators who are capable of managing higher risk. Similarly, requiring originators with ≥10% retention to conduct due diligence over one-third of the pool may be onerous, especially for large or complex portfolios. While the ReM framework shows promise, its success depends on the development of a competent ecosystem. In the absence of strong oversight and capacity-building, there is a risk of replicating the inefficiencies associated with ARCs.

Comparison with European Union’s (EU) NPE Securitisation Rules
The RBI’s 2025 draft shares much with the EU’s NPE securitisation rules, but differs in how it handles retention, recovery, and investor safeguards. EU STS NPE mandates that originators retain ≥5% net economic interest and explicitly allows a qualified servicer to be the risk-retainer. India’s draft instead caps originator exposure at 20%, treating any slice above 10% as first-loss. Retention may be held by the originator or a designated Resolution Manager (ReM). In short, the EU fixes a minimum skin-in-the-game, whereas India forces deeper first-loss retention.Both regimes require detailed loan-level disclosures. EU rules (the Securitisation Regulation) mandate standardized ongoing reporting (recently extended to NPEs). Similarly, the RBI draft obliges originators to provide investors with full loan-level data in the offer document and to furnish quarterly pool- performance reports Thus each system emphasizes data-sharing so investors can monitor credit quality and cash flows.In the EU, the servicer handles workouts and may hold the retained stake (no separate “recovery manager” is imposed) as opposed to India’s independent ReM to oversee the workout and maximize recoveries. This extra layer proposes improving oversight but risks additional cost.Both require professional investors to conduct due diligence and apply conservative capital treatment to junior tranches. EU law forces investors to verify loan data, and CRR risk weights favor STS senior tranches only when NPEs are heavily discounted. India likewise mandates strict due-diligence and assigns very high risk-weights to weakly-rated tranches. Each approach mirrors the other’s spirit (rigorous disclosure, meaningful retention, safeguards) while adapting to local context.

Conclusion
The RBI’s 2025 draft on stressed asset securitisation marks a transformative shift in India’s NPA resolution framework, aiming to unlock capital trapped in non-performing loans through a market-based approach. By enabling banks and financial institutions to transfer stressed assets to investors via securitisation, the draft enhances transparency, mandates independent valuations and introduces Resolution Managers to streamline recoveries. While the framework’s wide applicability, risk caps and disclosure requirements foster systemic consistency and investor protection, challenges like high capital charges, valuation costs, and due diligence burdens may deter smaller players. Compared to the EU’s NPE rules, India’s approach balances rigorous oversight with local adaptability but adds complexity with ReM requirements. If implemented effectively, this framework could deepen India’s distressed-debt market, improve credit flow, and reduce taxpayer burdens provided stakeholders address operational challenges and build a robust ecosystem for resolution.