what is direct assignment

An ISO/IEC 27001:2013 certified organisation

What is direct assignment (da).

Direct Assignment (DA) is a type of asset-backed securities (ABS) transaction. ABS are financial instruments similar to bonds, and contracts that represent a claim on cash flows from a pool of underlying assets. In the context of the lending business of the Banking industry, the ABS transaction that Direct Assignment functions upon is loan assets.

How does Direct Assignment Work in India?

The DA Business can be best understood by factoring in 3 main Stakeholders/Players

Originators (Original Owner of Loan Portfolio)

Buyers (Investors)

Reserve Bank of India (RBI)

Originators

Originators typically NBFCs and Banks sell their loans or receivables to buyers, becoming co-lenders. The credit risk is now shouldered by the Originator and Co-Lender in proportion to the shares. The original owners or originators continue to service the loan on behalf of the Investors. The originator retains the right to manage the loans, collections and payments from borrowers and forward them to the investor. In doing so, originators gain by converting their illiquid loan asset products into cash or liquidity that empowers them to manage their operations, meet short-term obligations and also expand their business strategically. Originators are also paid maintenance fees by the investors for managing loan servicing activities on their behalf.

Investors/Buyers

Investors/Buyers are typically banks that benefit from purchasing these loan assets because it empowers them to not only grow/expand in Scale but also to meet their Priority Sector Obligations (PSL) requirements.

Taking Priority Sector Obligations as an example, PSL obligations guidelines are set by the RBI as lending targets for banks to fulfil as part of the initiatives taken for the Socio-economic development of the country. Banks purchase priority sector loans and thereby not only meet their lending targets but also benefit from mitigating risks and diversifying portfolios.

The RBI plays a vital role in regulating DA activities by setting strict guidelines and practices for efficient, ethical and legal conduct of business. At its core, below are some of the major requirements (not limited to), that are to be followed.

MRR or Minimum Retention Requirement specify that Originators must retain a minimum portion of loans or in other words a stake in securitized assets to ensure they can carry out due diligence of loans to be securitized

True Sale Criteria is a set of criteria in place for the originators to sell their loan portfolio to Investors in a manner that when met implies that the sale is genuine. In other words, the investor is well-informed by the originator of all associated risks and rewards.

Reporting and Disclosure Requirements include finer details such as the nature of assets, and deal terms that are provided to the Investors showcasing proof of compliance with RBI guidelines and proving transparency.

Prudential Norms are guidelines set by the RBI for Risk Management, capital adequacy and other financial parameters to ensure smooth conduct of the DA business.

Challenges with the Direct Assignment Business

At its core, challenges arise from manual processes used in loan management and the synchronization with originator systems for maintaining accurate information. While the former is an operational challenge the latter is an accounting & Transparency challenge.

Below, is an expansion of the same

Multiple formats from Originators

Dynamic Credit Policy

Compliance with Statutory Regulations

Due Diligence Process

MIS Reporting and Reconciliation

Auditable Processes

SIMSMART To Manage Direct Assignment Deals

SIMSMART is a fully automated system for tracking and managing the whole lifecycle of direct assignment negotiations from a buyer's or Investor's perspective. This solution ensures that Assignee's resources are used efficiently while also meeting statutory requirements.

SIMSMART provides a comprehensive solution to improve the efficiency of Direct Assignment loan management by addressing the challenges above. It supports standardized data formats, ensures seamless integration with multiple Originators, and eliminates manual data conversion errors. Through automated policy enforcement, the system enables dynamic credit policy management and adaptability to changing market conditions. SIMSMART ensures compliance with statutory regulations by providing a transparent audit trail that tracks all loan management activities for auditors. It automates task allocation, work status tracking, and report generation, reducing manual efforts and simplifying the due diligence process. The system also excels at providing automatic comprehensive MIS reports, expediting monthly pay-in data reconciliation, and simplifying accounting entry procedures, leading to time savings and lower mistake probability. SIMSMART also provides extensive auditing capabilities, ensuring that all processes are auditable and giving a clear activity trail for both internal and external audits.

Click on the button below to Schedule a Demo for SIMSMART with us.

We look forward to connecting with you!

About SIMSOL

SimSol  your trusted partner in B2B banking solutions, pioneering technology solutions in the lending business, invites you to experience the Future of Banking technology! We are an ISO/IEC 27001:2013 certified organisation and specialize in providing world-class solutions for the following and are committed to ensuring attractive ROI on the investments.

Business Process Management

Enterprise Resource Planning

Business Intelligence

Knowledge Process Outsourcing

View our Suite of Technology Products

Scolend | Solution for Lending |  

Scolend | Solution for Co-Lending | SIMPAY | Partner Payout Solution |

SIMSMART | Supporting Banks and NBFCs in their Direct Assignment deals |  

CHASSIST | NACH Management Solution |

SIMDOX | PDD Management Solution |

Recent Posts

Direct Assignment Business: Overcoming Multi-formats Challenges

Comentários

• Search Search Please fill out this field.
• Options and Derivatives
• Strategy & Education

Assignment: Definition in Finance, How It Works, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is an Assignment?

Assignment most often refers to one of two definitions in the financial world:

• The transfer of an individual's rights or property to another person or business. This concept exists in a variety of business transactions and is often spelled out contractually.
• In trading, assignment occurs when an option contract is exercised. The owner of the contract exercises the contract and assigns the option writer to an obligation to complete the requirements of the contract.

Key Takeaways

• Assignment is a transfer of rights or property from one party to another.
• Options assignments occur when option buyers exercise their rights to a position in a security.
• Other examples of assignments can be found in wages, mortgages, and leases.

Uses For Assignments

Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, or other asset of value. to another entity through a written agreement.

Assignment rights happen every day in many different situations. A payee, like a utility or a merchant, assigns the right to collect payment from a written check to a bank. A merchant can assign the funds from a line of credit to a manufacturing third party that makes a product that the merchant will eventually sell. A trademark owner can transfer, sell, or give another person interest in the trademark or logo. A homeowner who sells their house assigns the deed to the new buyer.

To be effective, an assignment must involve parties with legal capacity, consideration, consent, and legality of the object.

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans, or other obligations. Money is automatically subtracted from a worker's paycheck without consent if they have a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms.

A final example involves a lease assignment. This benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease, taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through an assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy . Any rental income would then be paid directly to the lender.

Options Assignment

Options can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price . The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer's rights. This is known as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option ) or buy (if a put option ) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away . For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Suppose a trader owns 100 call options on company ABC's stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

• Business Business Topics Big Shots Startups Brand Games Juicy Scams Under Business
• Finance Finance Topics News Platter Tax Club Macro Moves Your Money Under Finance
• Invest Invest Topics Stock Market Financial Ratios Investor's Psychology Mutual Funds Under Invest

Trending Topics

Securitization- the lifeline of nbfcs.

Gaurja Newatia

Created on 19 Sep 2019

Wraps up in 6 Min

Read by 14.1k people

Updated on 10 Sep 2022

Non- Banking Finance Companies ( NBFC’s ) play a significant role in driving growth and development by providing financial services to Micro, Small and Medium Enterprises (MSME’s) most suited to their business model. They aim at promoting inclusive growth in the economy by extending credit in rural sectors and financially weaker sections of the society.

While NBFC’s can generate funding from a variety of avenues- mutual funds, insurance companies, bonds, commercial papers, etc., it is lending by banks through securitization which helps NBFC’s to remain in business.

Let us now learn what exactly is securitization and how it is a significant growth vehicle for NBFC's.

What is Securitization?

Securitization is a process where a pool of securities is bundled together and are given credit rating by an independent credit agency and then are sold to investors at a fixed coupon rate. Securitization, as the name suggests, involves the transformation of loans, which are a kind of illiquid assets into liquid assets. The underlying assets are generally secured loans such as home loans, automobile loans and unsecured loans like personal loans, etc.

It is a process by way of which an originator (bank) pools together its assets and then sells it to a Special Purpose Vehicle (SPV) – an entity specially created for the process of securitization which further sells it to investors.

To get a better understanding, consider the following example:

Suppose, a small bank ABC with an existing loan portfolio of 100 crores wants to raise a loan of 50 crores by monetizing its current assets.

The ABC bank will pool together 50 crores worth of loan which might contain thousands of loans and sells them to the SPV for cash.

The SPV then obtains credit ratings from an independent credit rating organization based on the future cash flow generated and the quality of the pooled amount.

Assuming the actual returns from the total loan book is 10%, and over the three years, due to the risk factor involved, the pooled amount is sold at 8.5%

The margin of 1.5% is used as maintenance charges by SPV and obligator(bank) who is responsible for collecting cash flows from the borrowers and transferring them to the investors.

Certificates are created worth 50 crores and are opened for investment. Once the issue is fully subscribed, the cash flows will be collected from the borrower and will be disbursed among the investors for three years.

The difference between what is charged from the borrowers (10.5%) and what is paid to the investors (8.5%) will be the servicing fee.

Parties in a Securitization Process:

Types of Securitised Products in India

Pass-Through Certificates (PTC's)

Pass-Through Certificates are similar to bonds, the difference being that they are issued against underlying securities. The payment to investors constitutes interest payments and principal payments received by the obligator on a pro-rata basis after deducting the servicing fee. However, in a Pay-Through Certificate, the principal and the interest amount is not transferred to the investor. Instead, the investors are issued new securities by SPV in return to this.

Direct Assignment

Direct Assignment involves buying a loan book at a fixed interest rate. Suppose a bank is interested in increasing his exposure to agricultural loan, to fulfill this, he will directly buy the pool of agrarian loan from an NBFC. Here, the terms are negotiable and can be customized in favor of both parties.

Why would banks be buyers?

• As per the Reserve Bank of India, banks need to lend to the “priority sector” (Table 1), which includes the following categories:
• Agriculture
• Micro, Small and Medium Enterprises (MSME)
• Export Credit
• Social Infrastructure
• Renewable Energy

                              Table 1: Priority Sector Lending Requirements

Banks do not necessarily want to be the originators of the loan while on the other hand, NBFC’s would like to sell their loans for the purpose of generating more cash and extending more credit. To fulfill the requirements of the RBI, banks go for buying NBFC's loans.

• Commercial Banks can lend only at Marginal Cost of Funds based Lending Rate (MCLR) plus some spread where the MCLR is fixed (can be changed only at monthly reset dates) for each and every customer, and only the spread is variable. However, NBFC's can charge various rates from customer i.e., Prime Lending Rates (PLR) plus spread. Here, both PLR and Spread are variable. Thus, banks here can take advantage of higher interest rate margins earned by NBFC's.  
• When the RBI goes for slashing of lending rates, while banks have to pass on the interest rate benefits, NBFC’s can choose not to pass on the interest rate benefits to the borrowers. Thus, even though there is a cut in lending rates, the securitized pool sold to the banks will yield the same amount of returns.  
• There are some sectors, for example, Real Estate, where banks cannot lend directly due to restrictions imposed by the RBI. In such cases, banks can expand their portfolio and take exposure in such sectors through NBFC's.  
• Thus, through securitization, banks take advantage of Interest Rate Arbitrage and by earning some additional money through investing in NBFC’s.

How does the risk get shared?

Securitization is an easy way out for NBFC's, to transfer their pool of illiquid assets to banks in order to convert them into tradeable securities. However, to ensure that NBFC's do bear some risk even after the Securitization Process, the concept of Minimum Retention Ratio (MRR) was brought forward. This means if a part of the loan pool goes into default, the first blow will be borne by the originator(NBFC's)

The RBI guideline dated November 29, 2018, states that loans which have an original maturity of 5years or above which receive six monthly installments or two quarterly installments, the MRR requirements would be 20% of the book value of the loans being securitised/20% of the cash flows from the assets assigned.

Why are banks shying away from securitization? What exactly are the risks associated with lending to NBFC’s?

There are two risks associated with lending to NBFC’s

Consider a situation where ABC bank lends to XYZ, which is an NBFC. XYZ further gives it to a company, say PQR. If PQR defaults on payment, then XYZ would not receive payment who also would not be able to pay ABC. This is the solvency risk or the default risk or credit risk.

Let us now understand how NBFC’s face Liquidity Risk.

NBFC’s issue commercial papers or non-convertible debentures for short term (3 months-1 years) to raise money from various mutual funds, banks, etc. The raised money is then used to extend loans to borrowers for the long term (5 years). This means that NBFC's will return lenders their money within three months but will receive money from the borrower after five years. 

Why do NBFC's resort to this practice?

Only because short-term loans are cheaper, and long-term loans are expensive, NBFC's take advantage of the situation and earn an interest rate margin.

Let us now understand how exactly this technique works well for NBFC's.

To make this system work well, NBFC's go for rollover. Say, for example, an NBFC owes payment to its lenders for commercial papers after three months. To ensure complete repayment without default, the NBFC will issue new commercial papers to another set of lenders. The raised money will then be used to repay the earlier lenders. This is the Rollover Strategy. This goes on and on to ensure liquidity.

However, what if NBFC fails to find this set of new lenders?

To repay its previous lenders, it will approach its borrower asking for repayment. But, the borrower won't be able to repay the NBFC since all of its money would be invested in his project. This situation gives rise to what is popularly known as the Liquidity Crisis.

The Liquidity Crisis in one NBFC creates a general perception that all NBFC’s are going to default on their payments, creating a kind of systematic risk i.e., when one party suffers, all the parties suffer. The IL&FS liquidity crisis is one suitable example in this context.

The recent liquidity crisis is going to impact the sentiments of particularly Mutual Funds since any default in interest, or principal payments would ultimately have to be borne by the investors. Thus, the only way to lift NBFC’s out of the crisis is securitization. Hence, it would not be wrong to call Securitization- The lifeline of the NBFC sector.

How was this article?

Like, comment or share.

An Article By -

0 Post Likes

Gaurja is a Business Economics Student|Finance Enthusiast|Avid reader|

Topics under this Article

Share your thoughts.

We showed you ours, now you show us yours (opinions 😉)

Why not start a conversation?

Looks like nobody has said anything yet. Would you take this as an opportunity to start a discussion or a chat fight may be.

Related Articles

More titbits on the go

What is the Annual Percentage Yield and How is it Calculated?

17 Oct 2023

Home loan interest rates: Pay for a house, not a coffin!

04 May 2023

HDFC Bank Vs ICICI Bank: The race to the top is on!

22 Apr 2022

34.7k views

What is Mortgage Loan?

21 Apr 2022

Under Invest

"A few" articles ain't enough! Explore more under this category.

Don’t Know How to Invest? Here’s the Ultimate Solution to Your Problems

30 Mar 2024

Is Your Portfolio Volatility-Proof? A Financial Stress Test

27 Mar 2024

How to Choose Between Value & Growth Stocks for More Returns?

22 Mar 2024

How to Find Best Value Stocks in India?

12 Mar 2024

Share this post

Or copy the link to this post -

https://insider.finology.in/investing/securitization-the-lifeline-of-nbfcs

🤩 Reading never goes out of fashion.

You need to login to continue. Let's take your love for reading to the next level with:

• Custom feed of your chosen topics.
• Personal library of Liked & Bookmarked articles.
• Live to & fro comments with Insider.

• Submission Guidelines

Securitization and Direct Assignment Transactions in the Indian Economy

[ Vineet Ojha is Manager – IFRS & Valuation Services at Vinod Kothari Consultants Pvt Ltd]

The current financial year has witnessed a sharp surge and a life time high in the volume of securitization and direct assignment transactions in the Indian economy. Consequent to the funding problems that non-banking finance companies (NBFC) and housing finance companies (HFCs) have been facing over the last few months, direct assignments of retail portfolios have picked up considerable pace, with volumes touching an all-time high of Rs. 1.44 lakh crore during the nine-month period (April-December) of financial year 2019 (FY 19). Of this, around Rs. 73,000 crore was raised by NBFCs and HFCs through sell-down of their retail and small and medium enterprises (SME) loan portfolio to various investors (primarily banks). Investor appetite, particularly from public sector banks and private banks, is high at present, considering investors are not exposed to entity-level credit risk, and are seen taking exposure to the underlying pool of retail and SME borrowers. Yields have gone up significantly with the changing market dynamics. The momentum in the securitization market is likely to remain strong in the current fiscal as it is emerging as an important tool for retail-focused NBFCs for raising funds at reasonable costs while simultaneously providing a hedge against asset-liability mismatches. A visual trend of the market over the years can be seen below:

Source: India Securitization Market: Booklet by VKCPL

Why the sudden surge?

Looking at the figure above, we can see a sharp surge in the direct assignment volumes in FY19. A majority of the issuances comes from the third quarter with around Rs. 73,000 crores. Although the major driver is the Infrastructure Leasing and Financial Services Limited (IL&FS) imbroglio, it is not the only reason for this development.

IL&FS crisis

Following the IL&FS crisis, the Reserve Bank of India (RBI) has time and again prompted banks to assist NBFCs to recover from the cash crunch. However, wary of the credit quality of the NBFCs and HFCs, the banks have shown more interest in the underlying loan portfolios than on the originator itself. Through direct assignment and securitization, these institutions get upfront cash payments against selling their loan assets. This helps these institutions during the cash crunch. Funds raised by NBFCs and HFCs through this route helped the financiers meet sizeable repayment obligations of the sector in an otherwise difficult market.

RBI relaxes MHP norms for long tenure loans

Another reason that explains this sudden surge in the volume of direct assignment or securitization volumes is the relaxation of the minimum holding period (MHP) criteria for long-tenure loans by the RBI. This increased the quantum of assets eligible for securitization in the system. The motivation was the same is to encourage NBFCs and HFCs to securitize their assets to meet their liquidity requirements. More details about this can be found here.

Effects of Securitization

Primarily, priority sector lending (PSL) requirements were the primary drivers for securitization. The number of financial institutions participating in securitization were quite low. Now, for liquidity concerns, NBFCs and HFCs were forced to rely on securitization to meet their liquidity needs. This not only made them explore a new mode of funding, but also solved other problems like asset liability mismatches. In the nine months of FY19 and FY18, the share of non-PSL transactions has increased to 35 per cent compared to 24 per cent in FY17 and less than 20 per cent in the periods prior to that.

However, it is not a rosy picture all over. Due to the implementation of IFRS, upon de-recognition of a loan portfolio from the financial statements of the company, the seller shall have to recognize a gain on sale on the transaction. These gains disturb the stability of the profit trend in these financial institutions which would result in volatile earnings in their statements. The NBFCs have been trying to figure out solutions which would allow them to spread the gain on transfer over the life of the assets instead of booking it upfront.

The securitization market remained buoyant in the third quarter driven by the prevailing liquidity crisis following defaults by IL&FS and its subsidiaries. This surge is good for the Indian securitization market as India’s contribution to global securitization market, at about USD 12 billion, is barely recognized, for two reasons – firstly, India’s market has so far been largely irrelevant for the global investors, and secondly, bulk of the market has still been driven by PSL requirements. PSL-based securitizations obviously take place at rates which do not make independent economic sense. Now due to the surge in non-PSL based securitization, the rates at which the portfolios are sold are attractive to investors. This could attract global investors to the market.

Now that financial institutions have gained exposure to the securitization markets, they find that the transactions are attractive for sellers as well as investors. Our interaction with leading NBFCs reveals that there are immediate liquidity concerns. Banks are not willing to take on-balance sheet exposure on NBFCs; rather they are willing to take exposure on pools. Capital relief and portfolio liquidity are additional motivations for the originators (and other potential investors) to enter into securitization transactions.

– Vineet Ojha

About the author

Add comment

Cancel reply.

Save my name, email, and website in this browser for the next time I comment.

Notify me of follow-up comments by email.

Notify me of new posts by email.

Invoking India’s Money Laundering Regime for Environmental Crimes: Impact on Businesses

Data-protection in the international arbitration regime.

• ‘Beneficial Owner’ is not a ‘Related Party’ under the IBC

The Unavailability of Writ Jurisdiction for Interference with One-Time Settlements

SUBSCRIBE TO BLOG VIA EMAIL Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages

• Supreme Court on the Regularization of Temporary Employees
• A Stamp Paper – What Good is it Beyond Six Months?
• SEBI’s Order in the DLF Case: A Summary
• Section 14, SARFAESI Act: Settling A Jurisdictional Conundrum
• Foreign Jurisdiction Clauses in Commercial Contracts: An Indian Perspective
• Termination of Worker For ‘Loss of Confidence’ Does Not Amount To Retrenchment
• Creditors with Rejected Claims: Methods to Address Inadequacies under the IBC
• Validity of Employment Bonds in India

Recent Comments

• Umakanth Varottil on Supreme Court Invokes Article 142 to Permit Withdrawal of CIRP
• Araz Mirbavandi on Supreme Court Invokes Article 142 to Permit Withdrawal of CIRP
• Hari Prakash on Guest Post: Reduction of Provident Fund Contributions to Statutory Limits
• Adv Ragav on Secondment Taxation and the Northern Operating Systems Case
• Suchith on Coffee Plantations under SARFAESI: A Bitter Brew

Social Media

• View @IndiaCorpLaw’s profile on Twitter

• Securitisation Transactions
• Credit Rating Agency in India
• Rating Methodology
• Credit Rating
• Rating Scale
• Rating Criteria
• Rating Process
• Software Developed Modules
• System Architecture

RATING METHODOLOGY - SECURITISATION TRANSACTIONS

This note describes the rating methodology followed by Infomerics for rating securitisation instruments i.e., Direct Assignments (DA) and Pass-through certificates (PTCs) for various asset classes like., (Asset backed Securities) ABS, (Mortgage-backed Securities) MBS transactions, etc.,

What is Securitisation?

Securitisation is a process by which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV. Securitisation thus follows a two stage process. In the first stage there is sale of assets to a 'bankruptcy remote' SPV in return for an immediate cash payment, which is typically known as Direct Assignment (DA) transaction and, in the second stage, repackaging and selling the security interests representing claims on incoming cash flows from the assets to third party investors by issuance of debt securities typically known as Pass Through Certificates (PTCs).

A typical transaction structure is presented below-

The underlying assets are typically secured loans (like housing loans, auto loans, commercial vehicle loans, construction equipment loans, gold loans, etc.) or unsecured loans (like personal loans, consumer durable loans, microfinance loans, etc.). The SPV is generally in the form of trust, settled and managed by a trustee. The trust purchases the pool either at par or premium. The investors subscribes to PTCs issued by the trust. The PTCs are backed by the underlying loan receivables and the beneficial interest lies with investors. The Servicer (which is typically the originator itself) is appointed by the trust to service the loans. Servicer collects monies from the underlying borrowers and deposits the same into the trust account which is used by the trustee to make investor payouts as per the scheduled waterfall mechanism. Credit Enhancement is also provided to the SPV to cover any shortfall, if arises, in the pool of assets.

Credit Enhancement may be divided into First Loss facility and Second Loss facility. First loss facility represents the first level of financial support to a SPV as part of the process in bringing the securities issued by the SPV to investment grade. Any shortfall is first covered by utilizing the First loss facility. Second loss facility represents a credit enhancement providing a second (or subsequent) tier of protection to an SPV against potential losses. Once the First loss is fully utilized, any shortfall is then covered by utilizing the Second loss facility. In some transactions a ‘liquidity facility’ (usually in the form of fixed deposit) is also provided to help smoothen the timing differences faced by the SPV between the receipt of cash flows from the underlying assets and the payments to be made to investors.

Risk analysis

Infomerics considers the following factors in the risk analysis for ABS/MBS transactions-

1. Credit Risk pertaining to loan receivables

It pertains to the risk of non-payment by the borrowers in the underlying pool. This is due to the ability and/or willingness of the borrowers. Further the risk perception of the asset class the pool belongs also has an impact on the credit risk analysis.

Infomerics studies the following aspects to analyse the credit risk-

A. Portfolio Analysis

This involves the analysis of dynamic portfolio as well as static pools.

Dynamic portfolio analysis

In the dynamic portfolio analysis, Infomerics mainly studies the portfolio ageing (dpd movement), Non-Performing Assets (NPAs) analysis and the collection efficiency data.

Portfolio Ageing (days-past-due [dpd] movement)

This analysis looks at the breakup of the portfolio based on the ageing of the past dues. Thus the portfolio is divided into various buckets - current, 0-30 dpd, 31-60 dpd, 61-90 dpd and so on & so forth. This provides a quick measure of portfolio quality. If high proportion of the portfolio is current and in early buckets, it shows healthy performance and vice versa. Some of the key measures tracked by the market participants are 90+ dpd and 180+ dpd which are used as performance benchmarks. If a portfolio grows very rapidly, the lagged delinquency levels may also be calculated to negate the denominator effect.

Collection efficiency

The monthly collection efficiencies based on total collections, collections from current billings and collections from overdues, provide an indication about the performance of the portfolio; though dpd movement analysis is more accurate and detailed measure.

Given the current environment, which is very dynamic and vulnerable to external events, it is also pertinent to study the NPA movements to understand the portfolio quality. NPA for last 2-3 years will be analysed to understand the company’s credit policies, borrower’s credit discipline and portfolio performance in such turbulent times. NPA movements reflects the quality of portfolio, its resilience and the company’s credit underwriting policies/ processes.

Static Pool Analysis

A static pool refers to a pool of loans originated in a particular period of time say a month or a quarter. There is no addition to this pool over its tenure. In the overall portfolio, new contracts are added every month as the disbursements happen; however, the pool to be rated is static in nature i.e., no new contracts is added to it after securitisation. Hence, the static pool analysis is one of the key aspects of ABS/MBS risk analysis. As past securitised pools are akin to static pools, they may also be analysed for this purpose. Performance measures like, total overdues, 90+ dpd, 180+ dpd, collection efficiencies, etc., may be studied for each static pool over its tenure. A long history of static pool data, the average value, volatility and the trend provides a more accurate basis for the analysis of the securitisation transaction.

B. Pool Analysis

This entails the analysis of the pool to be rated. It includes the following factors:

Pool selection criteria

The pool characteristics will be based on the criteria on which the pool is selected. The pool selection criteria normally includes features like minimum seasoning (Minimum holding period), maximum LTV, maximum overdue status, tenure, etc. A pool selection criteria stipulating higher -seasoning and lower maximum LTV is considered favourable for the pool credit quality.

Pool characteristics

Pool characteristics indicate the future performance of the pool. If the characteristics are better, the pool is likely to perform better and vice versa. Some of the key pool characteristics are as follows:

C. Pool v/s portfolio analysis

As the pool is carved out of the total portfolio. It is necessary to understand if the pool is likely to perform similar, better or worse than the portfolio. Accordingly, the risk multiplier is applied to the base case scenario which is based on the portfolio performance. In the pool v/s portfolio analysis we compare the pool characteristics with the portfolio characteristics and benchmark it with the performance measure like 90+dpd, 180+ dpd, etc. If the pool has higher proportion of contracts in the segment where the performance is weaker, an additional stress is applied.

Consider a sample pool v/s portfolio analysis for geographical distribution as follows-

In the above example, the pool is expected to perform worse than the portfolio since pool has higher proportion of contracts from Tamil Nadu and Bengal which has higher 90+ dpd in the portfolio. Similar analysis is done for other key pool characteristics like LTV, tenure, etc. and a suitable stress factor or risk multiplier is then applied.

D. Originator/Servicer operation analysis

Infomerics’ rating methodology involves quantitative as well as qualitative factors. The originators/servicer operation analysis is a key qualitative factor. Infomerics studies the method of sourcing (direct or DSAs), underwriting standards and credit appraisal system, sanctioning authority & process, pre & post disbursement documentation, etc. As the originator also typically acts as servicer in Indian ABS and MBS transactions, the system of collection and monitoring of loans especially in the overdue buckets is also studied. In addition, the management quality and length of experience in the asset class, business growth and strategies, market position and reach, financial strength, etc. also considered. The originator liquidity is also studied as it gives comfort while rating securitisation transactions as it gives additional cushion to the investor in case of collections shortfall.

Market Risk

It mainly comprises the following-

Macro-economic and regulatory risk

The macro-economic situation in a country may have an impact on the underlying asset, the borrower segment, the servicer, etc. Thus, it can have an impact on the pool collections and hence ability to service the investors. Further, the regulatory changes can also be critical for the performance of the pool or any related aspects.

Prepayment Risk

The prepayment may impact pool cash flows and shortfalls depending upon the transaction structure. E.g. in a premium structure, it may lead to premium loss to be drawn from credit enhancement and in a par structure, it may lead to loss of excess interest spread (EIS) though it may also reduce the credit risk. Infomerics applies appropriate stress factor due to prepayment risk depending upon the past prepayment rates observed in the portfolio as well as the asset class the pool pertains to.

Interest rate Risk

The interest rate risk arises if there is any mismatch between cash inflows and payouts in terms of fixed v/s floating interest rate or if there is a different floating rate benchmark for inflows and payouts. Infomerics applies appropriate stress factor to account for interest rate risk which is typically more significant in an MBS transaction.

Counterparty Risk

Servicer/Collection Agent Risk

Servicer risk pertains to the risk of servicer being able to service the pool over the full tenure of the transaction. If the servicer goes bankrupt during the tenure of the transaction, then the pool collection may get impacted. In India, typically the originator itself is appointed as servicer by the trustee. Infomerics takes into account the Servicer’s length of experience in the particular asset class, management quality, collections process and follow-up mechanism, the quality of MIS, the credit quality of the servicer, any provision for back-up servicer, etc.

Commingling Risk

It is the risk of cash flows of the servicer getting commingled with the cash flows pertaining to the pool. Typically, there is a time lag between the collections from the underlying borrowers and deposit of the same into the designated collection account. If a servicer goes bankrupt during this interval, there may be commingling risk. Infomerics typically considers the short term rating of the servicer to address this risk. Hence, proper ring-fencing of the pool cash flows/ waterfall mechanism for payments to the investors is crucial while rating the transaction.

Trustee Risk

The role of the trustee is one of the most critical factor in a securitisation transaction as the trustee needs to ensure adherence to the structure by various counterparties involved in the transaction and duly discharge its duties and obligation as well as exercise its rights, whenever needed. There is typically a ‘waterfall mechanism’ in the securitisation transaction which defines the priority of payments to be made. Trustee needs to ensure that this waterfall mechanism is strictly followed. Infomerics considers the quality of trustee in terms of the length of experience, its track record, reputation, etc. Also, in case of PTC transactions, the trustee has to provide payout reports to the CRAs on a monthly basis and hence adherence to the same is important to assess the pool performance.

Other Counterparty Risk

There may be several counterparties in a securitisation transaction like designated collection account bank, guarantee provider, etc. If any of the counterparty fails to perform its duties as per the transaction structure, it may impact the investor payouts. Infomerics considers the credit quality of such counterparties to address this risk.

Legal Risk and Pool Information Risk

Legal risk is one of the most important aspect in a securitisation transaction as the transaction involves transfer of receivables which must qualify as ‘true sale’ as per the law. This means that the seller does not retain any claim or control over the receivables. This makes the assets ‘bankruptcy remote’ of the originator/seller i.e. even the bankruptcy of the originator does not impact the right of the investors on the pool cash flows and credit enhancement. Infomerics typically relies on an independent legal opinion confirming the above to address this risk.

Further, Infomerics relies on the data provided by the originator, and given the criticality of the pool information to the rating; Infomerics requires an audit report certifying the accuracy of the pool information from an external Auditor.

Cash flow analysis and enhancement

Based on the analysis of the various factors mentioned above, and the payout schedule based on the waterfall mechanism, Infomerics prepares a customized cash flow model for the particular transaction. The base case scenario is based on the historical performance and various other factors enumerated above. Thereafter the stress factor is applied based on the particular rating level, volatility of performance, concentration risk, etc. The stressed cash flows from the pool are compared with the payouts to assess the credit enhancement level (First loss facility and second loss facility).

Additionally, the Master directions, guidelines and notifications of RBI on securitisation (subject to amendments made by RBI) are also considered while rating the securitisation transactions to ensure that the pool qualifies for securitisation. For example,

1) Minimum Holding Period (MHP): The transferor can transfer loans only after a minimum holding period (MHP), as prescribed below, which is counted from the date of registration of the underlying security interest:

a. Three months in case of loans with tenor of up to 2 years;

b. Six months in case of loans with tenor of more than 2 - <=5 years

2) Minimum retention requirement (MRR): The MRR is primarily designed to ensure that the originators have a continuing stake in the performance of securitised assets so as to ensure that they carry out proper due diligence of loans to be securitised. The originators should adhere to the MRR as detailed below while securitising loans leading to issuance of securities other than residential mortgage backed securities:

• For underlying loans with original maturity of 24 months or less, the MRR shall be 5% of the book value of the loans being securitised.
• For underlying loans with original maturity of more than 24 months as well as loans with bullet repayments of only either principal or interest, including the loans mentioned in clause 7, the MRR shall be 10% of the book value of the loans being securitised.
• In the case of residential mortgage-backed securities, the MRR for the originator shall be 5% of the book value of the loans being securitised.

Surveillance process: The below note provides the surveillance process followed for securitisations transactions rated by Infomerics.

1) In case of Direct Assignment (DA) transactions, surveillance process does not follows, since it a one-time rating exercise of providing loss estimation

2) In case of PTCs, the rating assigned is subject to monthly monitoring, quarterly reporting and annual surveillance

A) Monthly monitoring: For all PTC transactions, a monthly payout report is provided by the trustee to all the stakeholders which consists of information on debt servicing such as, monthly collections, payouts, prepayments (if any), utilisation of credit enhancement, outstanding loans and overdues details. Infomerics ensures that these reports are received on time and the performance of the pool is discussed internally and a suitable rating action will be taken in case of shortfall/utilisation of credit enhancement

B) Quarterly reporting: As per regulatory requirement, quarterly performance report of all securitisation transactions rated by Infomerics has to be disclosed on its website. The report typically consists of the details of the transactions rated, provisional ratings assigned, conversion of provisional rating to final rating, ratings withdrawn, rating transition, rating outstanding and originator wise performance of all pools (based on payout report provided by the trustee) rated by Infomerics. Infomerics ensures that the quarterly reports are published/disclosed on time as per regulatory requirement.

C) Annual surveillance: The rating assigned to PTC transaction is valid for 12 months from the date of assignment and hence has to be mandatorily reviewed before expiry of the rating like all other market instruments. Hence, Infomerics ensures that the review is carried out in a timely manner based on the pool performance through payout report made available by the trustee.

This note describes the rating methodology followed by Infomerics for rating instruments (PTCs- Pass through certificates) and facilities under (Asset backed Securities) ABS and (Mortgage backed Securities) MBS transactions.

WHAT IS SECURITISATION?

Securitisation is a process by which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV. Securitisation thus follows a two stage process. In the first stage there is sale of assets to a 'bankruptcy remote' SPV in return for an immediate cash payment and, in the second stage, repackaging and selling the security interests representing claims on incoming cash flows from the assets to third party investors by issuance of debt securities typically known as Pass Through Certificates (PTCs).

The underlying assets are typically secured loans (like housing loans, auto loans, commercial vehicle loans, construction equipment loans, etc.) or unsecured loans (like personal loans, consumer durable loans, etc.). The SPV is generally in the form of trust, settled and managed by a trustee. The trust purchases the pool either at par or premium. The investors subscribes to PTCs issued by the trust. The PTCs are backed by the underlying loan receivables and the beneficial interest lies with investors. The Servicer (which is typically the originator itself) is appointed by the trust to service the loans. Servicer collects monies from the underlying borrowers and deposits the same into the trust account which is used by the trustee to make investor payouts as per the scheduled waterfall mechanism. Credit Enhancement is also providedto the SPV to cover any shortfall, if arises, in the pool of assets.

Credit Enhancement may be divided into First Loss facility and Second Loss facility. First loss facility represents the first level of financial support to a SPV as part of the process in bringing the securities issued by the SPV to investment grade. Any shortfall is first covered by utilising the First loss facility. Second loss facility represents a credit enhancement providing a second (or subsequent) tier of protection to an SPV against potential losses. Once the First loss is fully utilised, any shortfall is then covered by utilising the Second loss facility.In some transactions a ‘liquidity facility’ is also provided to help smoothen the timing differences faced by the SPV between the receipt of cash flows from the underlying assets and the payments to be made to investors.

RISK ANALYSIS

1) Credit Risk pertaining to loan receivablesIt pertains to the risk of non-payment by the borrowers in the underlying pool. This is due to the ability and/or willingness of the borrowers. Further the risk perception of the asset class the pool belongs also has an impact on the credit risk analysis.Infomerics studies the following aspects to analyse the credit risk-

DYNAMIC PORTFOLIO ANALYSIS

In the dynamic portfolio analysis, Infomerics mainly studies the portfolio ageing (dpd movement) and the collection efficiency data.

i)Portfolio Ageing (days-past-due - dpd movement)

ii)Collection efficiency

STATIC POOL ANALYSIS

POOL SELECTION CRITERIA

The pool characteristics will be based on the criteria on which the pool is selected. The pool selection criteria normally includes features like minimum seasoning, maximum LTV, maximum overdue status, tenure, etc.A pool selection criteria stipulating higher minimum seasoning and lower maximum LTV is considered favourable for the pool credit quality.

POOL CHARACTERISTICS

C. POOL V/S PORTFOLIO ANALYSIS

As the pool is carved out of the total portfolio. It is necessary to understand if the pool is likely to perform similar, better or worse than the portfolio. Accordingly the multiplier is applied to the base case scenario which is based on the portfolio performance. In the pool v/s portfolio analysis we compare the pool chacterisctis with the portolfio characteristics and benchmark it with the performance measure like 90+dpd, 180+ dpd, etc. If the pool has higher proportion of contracts in the segment where the performance is weaker, an additional stress is applied.

In the above example, the pool is expected to perform worse than the portfolio since pool has higher proportion of contracts from Tamil Nadu and Bengal which has higher 90+ dpd in the portfolio. Similar analysis is done for other key pool characteristics like LTV, tenure, etc. and a suitable stress factor or multiplier is then applied.

D. ORIGINATOR/SERVICER OPERATION ANALYSIS

Infomerics' rating methodology involves quantitative as well as qualitative factors. The originators/servicer operation analysis is a key qualitative factor. Infomerics studies the method of sourcing (direct or DSAs), underwriting standards and credit appraisal system, sanctioning authority & process, pre & post disbursement documentation, etc. As the originator also typically acts as servicer in Indian ABS and MBS transactions, the system of collection and monitoring of loans especially in the overdue buckets is also studied. In addition,the management quality and length of experience in the asset class, business growth and strategies, market position and reach, financial strength, etc. also considered.

(2) MARKET RISK

MACRO-ECONOMIC AND REGULATORY RISK

PREPAYMENT RISK

The prepayment may impact pool cash flows and shortfalls depending upon the transaction structure. E.g. in a premium structure, it may lead to premium loss to be drawn from credit enhancement and in a par structure, it may lead to loss of excess interest spread though it may also reduce the credit risk. Infomerics applies appropriate stress factor due to prepayment risk depending upon the past prepayment rates observed in the portfolio as well as the asset class the pool pertains to.

INTEREST RATE RISK

The interest rate risk arises if there is any mismatch between cash inflows and payoutsin terms of fixed v/s floating interest rate or if there is a different floating rate benchmark for inflows and payouts. Infomerics applies appropriate stress factor to account for interest rate risk which is typically more significant in an MBS transaction.

E. COUNTERPARTY RISK

SERVICER/COLLECTION AGENT RISK

COMMINGLING RISK

It is the risk of cash flows of the servicer getting commingled with the cash flows pertaining to the pool. Typically there is a time lagbetween the collections from the underlying borrowers and deposit of the same into the designated collection account. If a servicer goes bankrupt during this interval, there may be commingling risk. Infomerics typically considers the short term rating of the servicer to address this risk.

TRUSTEE RISK

The role of the trustee is one of the most critical factor in a securitisation transaction as the trustee needs to ensure adherence to the structure by various counterparties involved in the transaction and duly discharge its duties and obligation as well as exercise its rights, whenever needed. There is typically a ‘waterfall mechanism’ in the securitisation transaction which defines the priority of payments to be made. Trustee needs to ensure that this waterfall mechanism is strictly followed. Infomerics considers the quality of trustee in terms of the length of experience, its track record, reputation, etc.

OTHER COUNTERPARTY RISK

There may be several counterparties in a securitisation transaction like designated collection account bank, guarantee provider, etc. If any of the counterparty fails to perform its duties as per the transaction structure, it may impact the investor payouts. Infomerics considers thecredit quality of such counterparties to address this risk.

4) LEGAL RISK AND POOL INFORMATION RISK

Legal risk is one of the most important aspect in a securitisation transaction as the transaction involves transfer of receivables which must qualify as ‘true sale’ as per the law. This means that the seller does not retain any claim or control over the receivables. This makes the assets ‘bankruptcy remote’ of the originator/seller i.e. even the bankruptcy of the originator does not impact the right of the investors on the pool cash flows and credit enhancement. Infomerics typically relies on an independent legal opinion confirming the above to address this risk. Further, Infomerics relies on the data provided by the originator, and given the criticality of the pool information to the rating; Infomerics requires an audit report certifying the accuracy of the pool information from an external Auditor.

5) CASH FLOW ANALYSIS AND ENHANCEMENT

Based on the analysis of the various factors mentioned above, and the payout schedule based on the waterfall mechanism, Infomerics prepares a customised cash flow model for the particular transaction. The base case scenario is based on the historical performance and various other factors enumerated above. Thereafter the stress factor is applied based on the particular rating level, volatility of performance, concentration risk, etc. The stressed cash flows from the pool are compared with the payouts to assess the credit enhancement level (First loss facility and second loss facility).

INTRODUCTION

Investors in securitisation transactions rely primarily on the underlying asset pool securing the transaction for repayment of interest and principal. The effective isolation of securitised pool from the credit risk of the assets of the originator can allow securtisation transaction to achieve a rating higher than that of the originator itself, if the securities are adequately protected from risk of loss at the originator level.

Infomerics will evaluate a securitisation transaction on a five-point criteria to assess whether the debt security (generally represented by PTC – Pass Through Certificate) will be fully repaid in accordance with the terms of the transaction: (i) legal structure, (ii) asset quality, (iii) credit enhancement by way of collateral coverage, (iv) financial structure; and the (v) quality of originator and servicer. All of these criteria are the principal elements that shape the credit profile of the transaction and, thereby, the determination of a rating opinion on the transaction.

LEGAL STRUCTURE

A securitised transaction is distinguished from the corporate credit risk of the original owner, or “originator,” of those assets through isolation, or “de-linking” by way of an underlying pool of cherry-picked assets. The aim is to correlate the primary credit risk of the transaction to that of the pool quality; rather than the idiosyncratic credit risk of the originator. This is achieved in securitisation transaction, either directly or indirectly, by the sale of an identifiable and specific pool of the originator's assets, to a special purpose vehicle (SPV) which will lead to neither the assets nor their proceeds to be consolidated as part of the bankruptcy estate of the originator/seller in the event of its insolvency.

The SPV acquires cash generating assets by issuing PTC and using the proceeds of that issuance. The cash and all the benefits associated with such assets are passed through to the SPV to service the debt.

As bankruptcy of the SPV is rendered remote through various structural features, SPVs are often described as “bankruptcy remote”. SPVs do not assume debt other than rated debt or subordinated debt as they are not operating businesses unlike the originator. SPVs have a separate independent and legal structure than their parents as they are established for a specific and limited purpose, i.e. for issuing the PTCs. Thus, relative to corporate credit, the SPV provides improved outcome predictability as the risk factors associated with a securitisation transaction are ensconced primarily within the asset pool transferred to the SPV.

An organisation’s legal form will be determined and regulated by local law in the jurisdiction where the SPV is created. An SPV in a securitisation transaction is mainly in the form of a limited liability company, a trust, limited liability partnership, or other form of body corporate (depending on the local law in the place of establishment).

ASSET QUALITY

Loss expectation under a base scenario is analysed through the assets’ credit characteristics by Infomerics. This assumption is stressed further through each successive rating category, such that securities rated in the high investment-grade categories have loss expectations that are consistent with low probability, high-severity stress scenarios.

A broad spectrum of financial assets collateralises securitisation transaction. Mortgage loans secured by residential and commercial properties, consumer assets such as credit card receivables and auto loans, and corporate loans are the most common assets that are securitised. Securitisation transactions are broadly classified by Infomerics into four main categories: RMBS (Residential Mortgage Backed Securitisation), CMBS (Commercial Mortgage Backed Securitisation, ABS (Asset Backed Securitisation) and structured credit. Within these categories, there is a variety of sub-categories; for example, the ABS category encompasses consumer (e.g., auto loans, credit cards and educational loans, among others) and commercial assets (aircraft leases, franchise loans and corporate-linked future flows, among others), as well as Asset-Backed commercial Paper (ABCP) conduits.

The rated PTCs in securitisation transactions are serviced out of the underlying loan portfolio and collateral, if required. The assets' credit characteristics are analysed to derive a loss expectation under a scenario that reflects Infomerics' current macro-economic expectations. This is commonly referred to as the base case scenario. The base case scenario is a description of expected asset loss only, without the reflection of potential loss-reducing structural features of the transaction. The Independent Rating Committee provides a rating opinion on base case loss expectations based on values derived by one of the approaches listed below before assigning the final rating:

• Default probability and loss severity are imputed to each individual loan based on loan-level characteristics through the output of analytical models developed by Infomerics. The underlying pool's loss rate is calculated using default models. This approach is typically used in the analysis of RMBS and CMBS multi-borrower transactions.
• The asset portfolio is analysed based on the originators' historical performance for the Rating Committee to derive an expected loss. This approach is often used in the rating of consumer ABS transactions.
• The aggregate portfolio loss rate is estimated through simulation. Correlated portfolios of corporate exposure sectors such as CDOs (Collateralied Debt Obligation) and CMBS are analysed through this approach. Separate adjustments or stresses are applied for individual simulation models. For example, the CMBS analysis often employs stressed values for rental income decline and capitalisation rates.

Loss expectations are generated under increasingly severe assumptions in addition to the derivation of a base case. The loss expectation is higher for each successive rating category, such that securities rated in the high investment-grade categories have loss expectations that are consistent with low probability, high-severity stress scenarios.

The higher rating categories loss expectations are often expressed as a multiple of base case loss estimate. For instance, an asset pool may be expected to experience 2% losses in a base case scenario, but in an Infomerics AAA(SO) scenario, the collateral pool may be expected to experience losses 4.0 times(x) greater than the base case, or 8% of the collateral pool's balance.

CREDIT ENHANCEMENT

The mechanism that provides PTC holders with protection from losses on the underlying pool is termed as credit enhancement. The rating for each bond is a reflection of the bond having sufficient credit enhancement to withstand default given the expected losses on the underlying collateral pool (determined by Infomerics under the rating stress scenario associated with the relevant bond rating).

Infomerics’ ratings for each bond is a reflection of whether the bonds have sufficient credit enhancement available to withstand default given losses on the underlying collateral pool that is expected under the rating stress scenario associated with the relevant bond rating. Credit enhancement can be sourced internally through various forms as subordination, excess interest or over-collateralisation (OC) or cash collateral or externally by a third-party provider in the form of a provision of reserve fund account, external equity, financial guarantee or a combination of the above. Credit-linked securitisation transaction typically do not have additional credit enhancement; rather, the rating is dependent on the underlying entity or guarantee provider.

In a simple two-class senior-subordinated (senior/sub) structure, all losses on the asset pool are allocated first to the subordinate class until its balance is reduced to zero (assuming that the proceeds of the subordinated note were applied to purchase performing receivables). Thus, the subordinate class provides credit enhancement to the senior class. Generally, whatever cash is remaining is paid to the subordinated tranche post repayment of interest and principal due to the senior tranche. A subordinated bond can be written down each month by an amount equal to realised losses on the underlying collateral or incur shortfalls if collections are insufficient to repay the full due amount. In case, the size of the credit enhancement is consistent with Infomerics’ loss expectation derived under its AAA(SO) stress scenario and if the bond is able to make timely interest payments, then the senior bonds can achieve an AAA(SO) rating from Infomerics.

Many a time, securitisation transactions are “tranched” into multiple senior/sub classes with ratings ranging from AAA(SO) through B(SO). Losses are generally allocated in reverse sequential order commencing with the most junior and lowest rated tranche. The junior tranche’s protection is generally provided either by excess interest, OC, an unrated class that is allocated losses first until it is reduced to zero, or a cash reserve fund fully funded at closing (or with monthly excess interest) that will be utilised first to cover losses. The adequacy of the total credit enhancement or other forms of protection given the loss scenarios for the rating category concerned is reflected in the rating of the junior tranche. Generally, the credit enhancement available to the junior tranche coupled with the subordination of the junior tranche reflects the protection available for the most senior tranches.

FINANCIAL STRUCTURE

Infomerics will analyse any counterparty dependencies, such as provision of derivatives, bank accounts, or financial guarantees, as these represent credit exposures beyond the securitised asset pool. In the absence of any structural mitigants, securitisation transactions which are dependent on the credit quality of an underlying entity or guarantee provider are credit-linked to those entities.

The senior classes have priority in payment of interest and repayment of principal over the subordinated class in senior/sub SF transactions. However, AAA(SO) rated tranche, which is typically the most senior class, is often split into multiple PTCs with varying maturities or payment schedules. The manner in which principal collected on the asset pool is distributed among PTCs varies; though the amount of loss protection for a rated tranche provided by subordination, excess interest, or OC is generally unaffected by the financial structure.

The specific structure of the transaction concerned in assessing the adequacy of credit enhancement at each rating level is covered by cash flow modelling. A number of stress assumptions that are applied at different rating levels is included in the cash flow criteria. Stresses may include, but are not limited to:

• High and low prepayment stresses;
• Asset coupon compression to stress revenue levels;
• Front- or back-loaded (or other) timings for when defaults and losses occur;
• Interest rate stresses to assess the materiality of unhedged exposures, as well as carrying costs associated with defaulted assets;
• Basis risk stresses to assess unhedged exposures regarding different interest rate bases for assets and liabilities;
• Foreign exchange stresses to assess exposures to unhedged currency risks.

The asset class and type involved and the financial structure of the transaction concerned will influence the extent and nature of cash flow stresses.

Originator and Servicer Quality

The securitisation transaction and performance of the underlying assets can be affected by the originator, servicer, and CDO asset manager. The operational processes for each originator, servicer, or asset manager participating in a securitisation transaction rated by Infomerics is reviewed by Infomerics’ operational risk team or asset-specific rating analysts

The assessment indicated by an internal score, opinion or public rating may lead to adjustments to a transaction's base case expected loss and credit enhancement levels, application of a rating cap or cause Infomerics to decline to rate a transaction.

SURVEILLANCE:

After assignment of rating, Infomerics monitors the performance of the portfolio in accordance with its prescribed surveillance process, until the PTCs are paid in full or the rating is withdrawn. Out of the five key rating factors as discussed above, asset quality, credit enhancement and the quality of originator & servicer often evolve over the term of a transaction. In contrast, legal structure and financial structure are usually stable and affected only by specific events.

Address: Flat No. 104/108, First Floor Golf Apartments, Sujan Singh Park, Maharishi Ramanna Marg, New Delhi – 110003, India

Phone: +91-11-41743541/ 41410244 / 24611910/ 24654796 

Address: Office No - 1102,1103,1104, B – Wing, Kanakia Wall Street, Off. Andheri Kurla Road, Andheri East, Mumbai - 400093, India

Phone: 022- 62396023 / 62396053

Address: 702, Sankalp Square 3, Taj Building, Sindhu Bhavan Road, Ahmedabad – 380059, Gujarat, India

Phone: +91 79 40393043, 8929802910

Address: "4th Floor, PS Arcadia Centrum, 69B, Park Street, Kolkata 700016, West Bengal, India"

Phone: +91-033-48033621, 46022266, +91-8929802903

Address: 1001, 10th Floor, Prestige Meridian - Tower II, 29, M G Road, Bangalore - 560001, Karnataka

Phone: +91-80-41216812, 8929802937

DELHI-NCR OFFICE

Address: 15, K.G. Marg, Mercantile House, Mezzanine Floor, New Delhi - 110001, India.

Phone: +91-11-45579024/ 41735279

An official website of the United States government

Here's how you know

Official websites use .gov A .gov website belongs to an official government organization in the United States.

Secure .gov websites use HTTPS A lock ( Lock A locked padlock ) or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites.

• A–Z Index
• Operating Status

Resources For

• New / Prospective Employees
• Federal Employees
• HR Professionals

Summary of Reassignment

This summary of reassignment covers the following topics:

• Learning About Reassignment
• Definition of Reassignment
• The Agency's Right to Reassign
• Reassignment Without Regard to RIF Retention Standing
• Separation After Declining Geographic Reassignment
• Qualifications and Reassignment
• Relocation Expense Allowances
• Additional Information from the Agency
• Additional Information from OPM

1. Learning About Reassignment

The reassignment regulations give an agency extensive flexibility in reassigning an employee to a different position.

This summary covers the procedures in the reassignment regulations. With this summary, employees, managers, union representatives, and others will have an overview of both the agency's and employees' rights in a reassignment situation.

The appropriate human resource office (HRO) in the agency can provide additional information on specific questions relating to reassignment policies, options, and entitlements.

2. Definition of Reassignment

The regulations published in section 335.102 of title 5, Code of Federal Regulations (5 CFR 335.102) cover reassignment of competitive service employees, while the regulations published in section 302.102(a) (5 CFR 302.102(a)) cover reassignment of excepted service employees.

Section 5 C.F.R. 210.102(b)(12) of the regulations defines reassignment as:

". . . a change of an employee, while serving continuously within the same agency, from one position to another without promotion or demotion."

Back to Top

3. The Agency's Right to Reassign

An agency may reassign an employee when:

The agency has a legitimate organizational reason for the reassignment; and

The vacant position is at the same grade, or rate of pay (i.e., if the movement is between pay systems such as from a General Schedule position to a Federal Wage System position), as the employee's present position.

The agency's right to direct reassignment includes the right to reassign an employee from a special rate position to a non-special rate position at the same grade, or to a position with less promotion potential than the present position. (Reassignment to a position with more promotion potential than the present position requires competition under the agency's merit staffing plan.) The position to which the agency reassigns an employee may be located in the same or a different geographic area (e.g., reassignment from Houston to Washington, DC).

4. Reassignment Without Regard to RIF Retention Standing

An agency may reassign an employee without regard to the employee's reduction in force retention standing, including an employee's veterans' preference status. A reassignment to a vacant position at the same grade is not a reduction in force action even if the agency abolishes the employee's former position

At its option, an agency may adopt a policy to select employees for reassignment on the basis of considerations such as retention standing, total service with the agency, length of time in a position or in the organization, etc. Again at its option, an agency may canvass its employees to determine whether an individual employee would prefer reassignment to a specific location, a new organization, and/or to a position with different duties and responsibilities.

5. Separation After Declining Geographic Reassignment

The agency must use the 5 CFR part 752 adverse action regulations when separating an employee who declines a directed reassignment to a position in a different geographic area.

An employee who is removed by adverse action for declining geographic relocation is potentially eligible for most of the benefits that are available to a displaced employee separated by reduction in force (e.g., intra- and interagency hiring priority, severance pay, discontinued service retirement, etc.).

An employee who declines reassignment to a position in the same geographic area as the present position (e.g., from an Atlanta position to a different Atlanta position) is not eligible for any career transition assistance or other benefits.

6. Qualifications and Reassignment

The agency's basic right to reassign an employee is based, in part, on the agency's determination that the employee is qualified for the position to which the employee will be reassigned.

An agency may also reassign an employee to a position if the agency modifies or waives qualifications for the vacant position, consistent with OPM's requirements for these actions.

7. Relocation Expense Allowances

An employee is generally eligible for relocation expense allowances for a directed reassignment that requires relocation to a different geographic area

The General Services Administration (GSA) publishes its Federal Travel Regulation (FTR) in 41 CFR subpart F. The complete FTR and other relocation-related information are available on GSA's website at  www.gsa.gov .

8. Additional Information from the Agency

The agency's human resources office (HRO) can provide both employees and managers with additional information on OPM's reassignment regulations. The HRO can also provide information on potential benefits, such as eligibility for:

• Career transition assistance
• Separation incentives (if available)
• Rehiring selection priority
• Severance pay
• Unemployment compensation
• Relocation allowances.

9. Additional Information from OPM

OPM provides additional restructuring information on the OPM website at  www.opm.gov .

What is Cost Assignment?

Share This...

Cost assignment.

Cost assignment is the process of associating costs with cost objects, such as products, services, departments, or projects. It encompasses the identification, measurement, and allocation of both direct and indirect costs to ensure a comprehensive understanding of the resources consumed by various cost objects within an organization. Cost assignment is a crucial aspect of cost accounting and management accounting, as it helps organizations make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

There are two main components of cost assignment:

• Direct cost assignment: Direct costs are those costs that can be specifically traced or identified with a particular cost object. Examples of direct costs include direct materials, such as raw materials used in manufacturing a product, and direct labor, such as the wages paid to workers directly involved in producing a product or providing a service. Direct cost assignment involves linking these costs directly to the relevant cost objects, typically through invoices, timesheets, or other documentation.
• Indirect cost assignment (Cost allocation): Indirect costs, also known as overhead or shared costs, are those costs that cannot be directly traced to a specific cost object or are not economically feasible to trace directly. Examples of indirect costs include rent, utilities, depreciation, insurance, and administrative expenses. Since indirect costs cannot be assigned directly to cost objects, organizations use various cost allocation methods to distribute these costs in a systematic and rational manner. Some common cost allocation methods include direct allocation, step-down allocation, reciprocal allocation, and activity-based costing (ABC).

In summary, cost assignment is the process of associating both direct and indirect costs with cost objects, such as products, services, departments, or projects. It plays a critical role in cost accounting and management accounting by providing organizations with the necessary information to make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

Example of Cost Assignment

Let’s consider an example of cost assignment at a bakery called “BreadHeaven” that produces two types of bread: white bread and whole wheat bread.

BreadHeaven incurs various direct and indirect costs to produce the bread. Here’s how the company would assign these costs to the two types of bread:

• Direct cost assignment:

Direct costs can be specifically traced to each type of bread. In this case, the direct costs include:

• Direct materials: BreadHeaven purchases flour, yeast, salt, and other ingredients required to make the bread. The cost of these ingredients can be directly traced to each type of bread.
• Direct labor: BreadHeaven employs bakers who are directly involved in making the bread. The wages paid to these bakers can be directly traced to each type of bread based on the time spent working on each bread type.

For example, if BreadHeaven spent $2,000 on direct materials and $1,500 on direct labor for white bread, and $3,000 on direct materials and $2,500 on direct labor for whole wheat bread, these costs would be directly assigned to each bread type.

• Indirect cost assignment (Cost allocation):

Indirect costs, such as rent, utilities, equipment maintenance, and administrative expenses, cannot be directly traced to each type of bread. BreadHeaven uses a cost allocation method to assign these costs to the two types of bread.

Suppose the total indirect costs for the month are $6,000. BreadHeaven decides to use the number of loaves produced as the allocation base , as it believes that indirect costs are driven by the production volume. During the month, the bakery produces 3,000 loaves of white bread and 2,000 loaves of whole wheat bread, totaling 5,000 loaves.

The allocation rate per loaf is:

Allocation Rate = Total Indirect Costs / Total Loaves Allocation Rate = $6,000 / 5,000 loaves = $1.20 per loaf

BreadHeaven allocates the indirect costs to each type of bread using the allocation rate and the number of loaves produced:

• White bread: 3,000 loaves × $1.20 per loaf = $3,600
• Whole wheat bread: 2,000 loaves × $1.20 per loaf = $2,400

After completing the cost assignment, BreadHeaven can determine the total costs for each type of bread:

• White bread: $2,000 (direct materials) + $1,500 (direct labor) + $3,600 (indirect costs) = $7,100
• Whole wheat bread: $3,000 (direct materials) + $2,500 (direct labor) + $2,400 (indirect costs) = $7,900

By assigning both direct and indirect costs to each type of bread, BreadHeaven gains a better understanding of the full cost of producing each bread type, which can inform pricing decisions, resource allocation, and performance evaluation.

Other Posts You'll Like...

REG CPA Practice Questions Explained: Adjusting Gross Income with Self Employment and Other Items

REG CPA Practice Questions Explained: Adjusting Gross Income with HSA and Retirement Account Contributions

How Do Foreign Currency Fluctuations Affect Financial Statement Accounts?

How Do You Translate Foreign Currency Financial Statements into the Reporting Currency?

How Do Hedging Activities Affect the Accounting of Foreign Currency Transactions?

How are Foreign Currency Gains and Losses Reported in the Financial Statements?

Helpful links.

• Learn to Study "Strategically"
• How to Pass a Failed CPA Exam
• Samples of SFCPA Study Tools
• SuperfastCPA Podcast

How Josh Passed His CPA Exams Using Shorter Study Sessions

The Changes That Helped Marc Pass His CPA Exams After Failing 6 Times

The CPA Study Tweaks Gabi Used to Pass Her CPA Exams

How Skylar Went From a Psychology Major to Becoming a CPA

How Dalton Is Passing Exams by Making His CPA Study a Lifestyle

How Caroline Simplified Her CPA Study and Passed

Want to pass as fast as possible, ( and avoid failing sections ), watch one of our free "study hacks" trainings for a free walkthrough of the superfastcpa study methods that have helped so many candidates pass their sections faster and avoid failing scores....

Make Your Study Process Easier and more effective with SuperfastCPA

Take Your CPA Exams with Confidence

• Free "Study Hacks" Training
• SuperfastCPA PRO Course
• SuperfastCPA Review Notes
• SuperfastCPA Audio Notes
• SuperfastCPA Quizzes

Get Started

• Free "Study Hacks Training"
• Read Reviews of SuperfastCPA
• Busy Candidate's Guide to Passing
• Subscribe to the Podcast
• Purchase Now
• Nate's Story
• Interviews with SFCPA Customers
• Our Study Methods
• SuperfastCPA Reviews
• CPA Score Release Dates
• The "Best" CPA Review Course
• Do You Really Need the CPA License?
• 7 Habits of Successful Candidates
• "Deep Work" & CPA Study

This browser is no longer supported.

Upgrade to Microsoft Edge to take advantage of the latest features, security updates, and technical support.

What is better approach to assign the licenses in M365 tenant and why? i.e., Group based or direct assignment.

What are the benefits we get on above said options and what it covers if we select any one of these?

Microsoft 365 Formerly Office 365, is a line of subscription services offered by Microsoft which adds to and includes the Microsoft Office product line. 3,661 questions Sign in to follow

Hello Vinod,

Both group-based and direct assignment of licenses in Microsoft 365 (M365) have their specific use cases and benefits. The right choice for your organization depends on its size, complexity, and administrative preferences. Here's a comparison to help you decide:

1. Group-Based Licensing (Dynamic Licensing): Group-based licensing uses Azure Active Directory (Azure AD) groups to assign licenses.

Automation : When you add a member to an Azure AD group, they automatically receive the licenses assigned to that group. When you remove them, the licenses are automatically reclaimed. This is highly efficient for larger organizations or organizations with frequent user changes.

Consistency : Helps ensure users in specific roles or departments always have the correct set of licenses.

Scalability : It's easier to manage licenses for large numbers of users with group-based licensing than with direct assignments.

Reduced Administrative Overhead : No need to manually assign or remove licenses for each user. This can lead to significant time savings in larger environments.

Enhanced Organization : Using group-based licensing, you can easily see which licenses are allocated to which departments, roles, or other groupings.

2. Direct Assignment: Directly assigning a license means you grant licenses to each user individually.

Simplicity : For smaller organizations, direct assignments can be straightforward and quick.

Granular Control : You have the ability to assign or revoke specific licenses for individual users based on unique needs.

Clarity for Small Teams : In a small organization, it might be easier to keep track of individual user licenses than group memberships.

No Additional Configuration : Group-based licensing requires the initial setup of Azure AD groups and might require some ongoing maintenance. Direct assignment avoids this.

Which is better?

For larger organizations or those with frequent changes in staff or roles : Group-based licensing is often the better choice because it's more scalable, reduces administrative overhead, and provides more consistent license assignments.

For smaller organizations or those with stable staffing and less frequent role changes : Direct assignment can be simple and effective.

In summary, the better approach largely depends on the size of your organization and your administrative needs. If you value automation, scalability, and reduced administrative overhead, group-based licensing is likely the better choice. If you have a smaller team or need granular control over license assignments, direct assignment might be more appropriate.

All the best,

Thanks Ali AlEnezi

Its helpful

0 additional answers

Servicing Asset and Servicing Liability: A new by-product of securitization under Ind AS 109

( [email protected] )

Securitisation has gained popularity in India in the recent times, however, one more concept that has grown parallel to it is, direct assignment. In fact, at times, direct assignments have overpowered securitisation in the Indian market [1] . Financial institutions have been using these extensively to address their liquidity issues. However, if there is anything that affected the financial institutions dearly, then it is the change in the accounting treatment under the Indian Accounting Standards (Ind AS).

The Ind AS 109 has given securitization/ direct assignment accounting in the books of the transferor and the transferee a whole new shape [2] . One of the new concept that has arisen under the new standard is creation of servicing asset or servicing liability.

In this article we intend to cover this new concept at length.

Servicing Asset and Servicing Liability

In a securitization/ direct assignment transaction, the servicing of the underlying pools is retained by the transferor, for which it earns a servicing fee. Where, the compensation received for performing the servicing function is more than adequate, then, a servicing asset has to be created for the excess amount. However, where the compensation received for the servicing function is inadequate, the same must be recognized as a servicing liability in the books of the transferor.

In order to clarify the nature of a “servicing asset” and a “servicing liability”, reference is drawn from para 3.2.10 of Ind AS 109 which states that:

If an entity transfers a financial asset in a transfer that qualifies for de recognition in its entirety and retains the right to service the financial asset for a fee, it shall recognise either a servicing asset or a servicing liability for that servicing contract. If the fee to be received is not expected to compensate the entity adequately for performing the servicing, a servicing liability for the servicing obligation shall be recognised at its fair value. If the fee to be received is expected to be more than adequate compensation for the servicing, a servicing asset shall be recognised for the servicing right at an amount determined on the basis of an allocation of the carrying amount of the larger financial asset in accordance with paragraph 3.2.13.

Why is it a part of securitization?

The so-called servicing asset arises as an integral part of a transaction of securitisation or direct assignment. It arises when the financial asset is transferred to the Special Purpose Entity (SPE), but the originator retains the right to service the asset in exchange for a fee, which might give rise to a servicing asset or a servicing liability. Servicing asset or servicing liability arises as a by-product of securitization. The originator may or may not assume the role of a servicer, but if it does, then he charges a servicing fee for that. The relationship between actual servicing fee and normal servicing fee, results in either a servicing asset or servicing liability. In that sense, it is a carve-out from the composite asset, that is, the larger asset pre-securitisation. However, for creation of servicing asset or servicing liability, de-recognition of the assets is an important precondition.

Splitting of Composite Asset

Servicing asset or servicing liability is created after dismantling or de recognizing the larger pre securitization financial asset. For this purpose, splitting up of composite asset is to be done. When carrying out the splitting exercise, Ind AS 109 clearly lays out the method of decomposing the composite larger financial asset into the transferred portion and the retained servicing asset.

Please refer to the following paragraph:

3.2.13 If the transferred asset is part of a larger financial asset (eg when an entity transfers interest cash flows that are part of a debt instrument, see paragraph 3.2.2(a)) and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset shall be allocated between the part that continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer.

For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised.

The difference between:

(a) the carrying amount (measured at the date of derecognition) allocated to the part derecognised and

(b) the consideration received for the part derecognised (including any new asset obtained less any new liability assumed)  

shall be recognised in profit or loss.

In case of recognizing a service liability, liability for service obligation is recognised at Fair Value. In case of servicing asset, service asset is recognised for servicing right at an amount after carving out the servicing asset from the carrying amount of larger financial asset. The carrying amount of the larger composite asset is split between a part that is transferred, hence de recognised and another part that is recognised as servicing asset. This splitting of composite asset is done based on the fair value of both the parts as on the date of transfer. When allocating the carrying amount, it is required to measure the servicing asset at its fair value. This fair value can be arrived in two ways. One, when there exists a history of sale of similar parts or when market transactions for such parts exist, it would be best to take the actual transaction as an estimate of fair value. Two, if there are no such sale history or market quotes available, fair value can be arrived at by deducting the purchase consideration from the fair value of entire financial assets.

How does servicing asset translate into income over time?

Since the carrying value of the servicing asset is the present value, the present value will be unwound over time. Given the fact that the servicing fee in the present case is collected only at the end of the term, assuming that the valuation estimates do not change, the discounting charges will regularly be credited, with a corresponding debit to the value of the servicing asset. As a result, at the point of time when the servicing fee is to be received, the carrying value of the servicing fee is the same as the nominal amount of servicing fee receivable.

How does the value of servicing fee get re-evaluated over time

In the present case, possibly, the valuation of the asset will change as the probabilities of hitting the benchmark change over time. This will be a valuation gain/loss. Over time, as the chances or probability of collection from the obligor improve, then the servicing fee to be collected from the bank will also increase. However, if the probabilities of collection deteriorate, then service fee to be collected from bank will go down.

Recognition of Income- as Gain on Sale

When an originator assumes the responsibility of servicing the underlying loan pool, he undertakes to collect the payment from obligors, keep a certain percentage of it as servicing fee and transfer the remaining cashflow to the SPE. Here, the originator is assuming two roles – first, that of a transferor or assignor and second, that of a collection and servicing agent.

Please refer to the following paragraph from Ind AS 109:  

3.2.12 On derecognition of a financial asset in its entirety, the difference between:

(a) the carrying amount (measured at the date of derecognition) and

(b) the consideration received (including any new asset obtained less any new liability assumed)

Co. X is the originator of the loans, say 90% of the portfolio is sold, and Co. X assumes the role of a servicer. The disbursements from the portfolio is to be collected by X and then is to be disbursed to Bank Y (SPE). Upon successful collection by X, it will be compensated with the contractual cash flows as compensation. These cash flows are the retained servicing asset portion out of the transaction. Meaning, it is a carve-out of the part transferred leaving a lesser value. These contractual cash flows are to be recognised instead of the part de-recognised as the servicing asset.

The pre securitisation asset must be de recognised from the books of the originator if it meets the de recognition principles laid down in Ind AS 109. Then, separately a servicing asset or servicing liability will be recognised as discussed above.

Please refer to the following paragraph from Ind AS 109:

3.2.12 On de recognition of a financial asset in its entirety, the difference between:

shall be recognised in profit or loss.  

Based on above excerpt, once the servicing asset comes out from the composite asset [Servicing asset debit, composite asset credit], the carrying value of the composite asset stands reduced. Hence, the difference between the Purchase consideration and the appropriated value of the composite asset (after all retained assets have been carved out) leads to a gain on sale. Hence, the income that needs to be recognised upon creation of servicing asset is – a gain on sale .

Accounting of servicing asset or liability- upfront/ over the period/ rear-ended?

The accounting is to be upfront as the originated asset (loan portfolio) is to be derecognized upon transfer and a servicing asset/liability is to be reported depending upon the compensation. The servicing asset is the present value of the servicing fee. The discounting rate applied on the servicing fee depends on the seniority of the servicing fee. For example, in a model where computation of the expected value of the servicing fee is done using various scenarios and their respective probabilities, the risk inherent has already been captured in the expected value computation.

Some relevant FAQs

Servicing fee is receivable as per the collection agent. The SPE has the right to change the collection agent in the specified scenarios. Whether this has any impact on the timing of recognition of the income?

The ability of the SPE to change the servicing asset is, hopefully, on incurring of any events of default. It is not intuitive that the incentive servicing fee may be declined by arbitrary change of servicing agent.  

If the originator is required to raise invoice for servicing fee at the end of the tenure. How the same would be accounted?

The GST invoice for the servicing fee will be raised only when the same is actually accrued as per contract. Yes, there is a disconnect between GST invoicing and recognition of the servicing asset. Incidentally, the servicing income that comes into books as per the above method is only the normal servicing fee.

Will the unwinding of servicing asset be affected by implications of Ind AS 115- Revenue of Contracts from Customers?

The objective of Ind AS 115 is to lay down principles that an entity should apply to report useful information to financial statement users regarding nature, amount, timing and uncertainty of revenue and cash flows from a contract with customer.

However, the application of this standard does not extend to financial instruments and other contractual rights/obligations within the scope of Ind AS 109.

For reference, the extract is presented below:

• An entity shall apply this Standard to all contracts with customers, except the following:

(c) financial instruments and other contractual rights or obligations within the scope of Ind AS 109, Financial Instruments, Ind AS 110, Consolidated Financial Statements, Ind AS 111, Joint Arrangements, Ind AS 27, Separate Financial Statements and Ind AS 28, Investments in Associates and Joint Ventures; and

Thus, as securitization and its inherent servicing asset and servicing liability is covered under Ind AS 109, Revenue recognition as per Ind AS 115 does not apply to it.

Servicing asset or liability is a by-product of the process of securitization. When the servicing facility is retained by the originator, he does that in exchange of a servicing fee. Now comparison of the actual servicing fee with the expected servicing fee charged normally, gives rise to a servicing asset or liability. Servicing obligation becomes servicing liability and servicing right becomes servicing asset. The carve-out from the larger financial asset and its split accounting is discussed at length above.

[1] Read our articles on Indian securitisation market at:

http://vinodkothari.com/secart/

http://vinodkothari.com/sechome/

http://vinodkothari.com/secconc/

[2] Read our article on impact of Ind AS on securitisation transactions at:

http://vinodkothari.com/2017/05/accounting-for-securitization/

http://vinodkothari.com/2018/12/accounting-for-direct-assignment-under-indian-accounting-standards-ind-as/

http://vinodkothari.com/wp-content/uploads/2018/08/Securitisation-Differences-between-RBI-Guidelines-and-Ind-AS.pdf

http://vinodkothari.com/2018/11/impact-of-fair-value-changes-on-retained-earnings-during-first-time-ind-as-adoption/

http://vinodkothari.com/accountingissues/

Leave a Reply

Leave a reply cancel reply.

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Subscribe to receive regular updates!

Xiting Partner Portal | Xiting Support Portal

Direct vs. Indirect Role Assignments

In this article, I’ll discuss the differences between direct vs. indirect role assignment in the context of SAP authorizations. Each assignment scenario has its pros and cons, and you can use both independently or in combination to complement each other.

Table of Contents

What are direct role assignments?

Authorization roles (and profiles) are directly assigned to the user master record via individual transactions (SU01/SU10/PFCG), SAP Access Control (Access Request Management module), Central User Administration (CUA), or other tools like SAP Identity Management (IdM). As a result, the user gains SAP access rights through roles/profiles that are directly assigned to their user ID.

What are the pros?

• Flexible – users that hold the same job function can have different authorizations assigned to them
• Widely used – it is considered best practice and fully supported by SAP Access Control (GRC) and SAP IdM
• SAP Access Control Access Risk Analysis (ARA) and remediation are performed on the user level
• HR user master is not required (only SAP user account)

What are the cons?

• Historical assignments often remain undetected and result in too far-reaching authorizations
• Role admins may have to assign the same authorizations to users, even if they share the same job role
• Roles/Profiles must be requested and assigned manually

What are indirect role assignments?

Authorization roles (and profiles) are attached to positions, employees, or organizational units in the organization structure. The end user gains the access rights based on the assignment to the position in the HR organization. The user gains SAP access rights based on the position(s) that the personnel HR record is attached to.

• Same authorizations for everyone who is assigned to the same job role
• Authorization gets removed automatically if a person moves around the organization
• New authorizations  are added automatically if a person moves around the organization
• Newly hired employees get authorizations automatically when they start their job
• Less effort for administrators to initiate and manage access requests
• Inflexibility – everyone assigned to a position gets the same authorization (differences in authorizations need to be addressed separately)
• Each SAP user needs to have a record in HR that is assigned to a position
• SAP users need to be mapped with the personnel record in HR (info type 0105 (Communication), subtype 0001 (SAP User))
• Changes in organizational management will have an impact on end-user access
• Additional training for administrators and approvers
• Encourages the use of composite roles
• Requires extra effort in HR to maintain the organizational data, while it doesn’t add value to HR to keep that type of data
• Practically only works in organizations with a low rate of changes (e.g. public sector)

Combining direct and indirect role assignment

Both scenarios can be used in combination, eliminating some of the cons of individual assignment scenarios. Combining both scenarios (direct and indirect assignment) means that you can assign basic access indirectly, via the job position(s) but then assign additional authorizations to the user master record directly.

How does the combined scenario look like?

A user gains SAP access rights based on the position(s) that their personnel HR record is attached to, as well as through roles/profiles that are directly assigned to the user ID.

• Combines the best of both scenarios
• Allows for a more flexible authorization design as compared to indirect role assignments
• Automatically grants basic authorizations with the ability to assign additional access rights on a per-user basis
• Since access is not entirely distributed through the HR positions, individual roles/profiles must be requested
• In case SAP Access Control is used, role owners have to be aware of different types of assignment (either a role gets assigned to a user directly, or to a position that might have an effect for more than one user)
• HR Administrators and SAP User/Authorization Administrators must work together closely

Each scenario has its pros and cons, and therefore it’s hard to tell which scenario fits your requirements best. If you have a strong focus on HR and you rely on position-based authorizations, that might be the right choice. In case your HR data, which is the foundation for position-based authorizations is not properly maintained nor kept up-to-date, indirect authorizations might not work. A hybrid approach, however, combines both and hence is in many cases an accepted first move towards granting indirect authorizations. Xiting has successfully implemented hybrid models where basic authorizations were indirectly assigned (e.g. ESS/MSS authorizations), but additional roles were directly assigned through SU01 or workflows.

• Recent Posts

• Strengthening SAP Security in the Age of DORA: A Guide for Financial Entities - 12. March 2024
• Leveraging IGA for Enhanced Security: An Overview and the Unique Offerings of Xiting - 22. August 2023
• The Power of SAP Cloud Connector: Bridging Cloud and On-Premise Landscapes - 24. May 2023

Get in touch with us!

Do you have questions about our products?

Attend our live webinars and learn more from our experts about SAP authorizations, XAMS, SAP IDM and many other topics in the context of SAP security.

• HCM Data Loading Business Objects

Guidelines for Loading Core Skills

The Skills Assignment object hierarchy helps to assign core skills to workers in bulk. You assign core skills to people within an organization identified by the manager of that organization.

The object hierarchy consists of the following objects:

Skills Assignment

This business object contains the high-level details for a core skill assignment. This includes details like unique name for the skill assignment, the manager of the organization to assign skills to and an action to specify if the intention is to assign or unassign a skill.

Specify the skill requirements for the assignees defined by the Assignee object. Core Skills capture details like name of the skill getting assigned or unassigned and the proficiency level needed for the skill.

Core skills are assigned based on the target worker population identified using by the manager of the organization and the assignee type.

All the assignee records within one SkillsAssignment need to have the same Assignee type. The following assignee types are supported:

Job: Specifies any jobs in the application, regardless of whether they have job profiles associated, so the skills will be assigned to anyone within the manager’s organization who has this job. When using the Job assignee type, supply the JobId attribute with the surrogate ID or an integration key value that identifies the job, or supply the user key attributes for JobId, viz JobCode and SetCode.

Person: Specifies people reporting to to the manager through a primary assignment. For this assignee type, mention the PersonId or user keys of PersonId like PersonNumber.

Direct Reports: Only the direct reports of the specified manager.

Organization: All of the manager’s organization or that of any of the lower-level managers reporting to the manager.

For assigning skills by a job within a specific team, use the Job assignee type, and populate PersonId of lower-level manager. This will assign the specified core skills to all the workers in lower-level manager's organization with matching job.

Use the Team Skills Center work area and Assign Core Skills page to review the data you want to bulk load for.

Post Processing

After the core skills are loaded, the scheduled process Propagate Dynamic Skills to Workers gets submitted by default.

If this default behavior needs to be changed, navigate to Configure HCM Data Loader task and review the Business Object Post Processes page. Search for the Skills Assignment business object and override the value to No. This will prevent the scheduled job from getting auto submitted after each skills assignment data load. After the override you need to manually run the scheduled job once Skills Assignment data loads are complete.

Related Topics

• Assigning Core Skills