On January 28, 2020, CRISIL downgraded its ratings on pass-through certificates (PTCs) issued by Nirmaan RMBS Trust – Series V – 2014 to ‘D’. The PTCs are backed by home-loan receivables originated and serviced by Dewan Housing Finance Corporation Ltd (DHFL), an entity currently undergoing the Corporate Insolvency and Resolution Process (CIRP). The PTCs continue to be in default after their February 2020 payouts, and despite the Ministry of Corporate Affairs (MCA) issuing a much-awaited notification on January 30, 2020, clarifying the treatment of third-party assets in insolvency proceedings.

Though pool collections have remained healthy (collection efficiency steadily above 99% over the past six months), PTCs backed by the aforementioned loan receivables did not receive their dues in full owing to unprecedented legal interpretation challenges that have evolved in recent months. The legal interpretation challenges highlighted in Table 1 resulted in a part of the collections from the securitised pools and the credit enhancement in the structure being inaccessible to the trustee, which thwarted timely payouts to PTC holders.

While the MCA notification is an important step in resolving the challenge of legal interpretation, grey areas remain.

CRISIL had, through press releases on October 22, 2019, and December 23, 2019, underscored the challenges that had emerged in the securitisation market after payment delays in DHFL-originated PTC transactions, their potentially crippling implications, and called for swift remediation.

It is crucial now that policy makers and regulators address the pending issues before the securitisation market, which has been growing very well of late, is derailed.