Module: | MODULE B: RISK MANAGEMENT
Q397: A commercial bank is acting as the originator for securitising a portfolio of long-term housing loans. The original maturity of the loans in the underlying pool is explicitly stated as 15 years (180 months).
Calculate the exact Minimum Retention Requirement (MRR) applicable for this securitisation transaction.
✅ Correct Answer: B
The correct answer is B. Building upon the Minimum Retention Requirement (MRR) framework, the RBI requires originators to absorb more risk for longer-tenure assets.
While loans with a maturity under 24 months require a 5 percent MRR, loans with an original maturity of more than 24 months carry a significantly higher long-term risk profile.
Therefore, for long-term exposures like 15-year housing loans, vehicle loans exceeding two years, or long-term corporate bonds, the regulatory MRR is strictly fixed at 10 percent of the book value of the assets being securitised.
The originator must maintain this 10 percent exposure continuously to ensure they share the risk alongside the Special Purpose Entity investors.
While loans with a maturity under 24 months require a 5 percent MRR, loans with an original maturity of more than 24 months carry a significantly higher long-term risk profile.
Therefore, for long-term exposures like 15-year housing loans, vehicle loans exceeding two years, or long-term corporate bonds, the regulatory MRR is strictly fixed at 10 percent of the book value of the assets being securitised.
The originator must maintain this 10 percent exposure continuously to ensure they share the risk alongside the Special Purpose Entity investors.