what is direct assignment

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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.

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Direct Assignment Business: Overcoming Multi-formats Challenges

cppreference.com

Assignment operators.

Assignment operators modify the value of the object.

[ edit ] Definitions

Copy assignment replaces the contents of the object a with a copy of the contents of b ( b is not modified). For class types, this is performed in a special member function, described in copy assignment operator .

For non-class types, copy and move assignment are indistinguishable and are referred to as direct assignment .

Compound assignment replace the contents of the object a with the result of a binary operation between the previous value of a and the value of b .

[ edit ] Assignment operator syntax

The assignment expressions have the form

• ↑ target-expr must have higher precedence than an assignment expression.
• ↑ new-value cannot be a comma expression, because its precedence is lower.

[ edit ] Built-in simple assignment operator

For the built-in simple assignment, the object referred to by target-expr is modified by replacing its value with the result of new-value . target-expr must be a modifiable lvalue.

The result of a built-in simple assignment is an lvalue of the type of target-expr , referring to target-expr . If target-expr is a bit-field , the result is also a bit-field.

[ edit ] Assignment from an expression

If new-value is an expression, it is implicitly converted to the cv-unqualified type of target-expr . When target-expr is a bit-field that cannot represent the value of the expression, the resulting value of the bit-field is implementation-defined.

If target-expr and new-value identify overlapping objects, the behavior is undefined (unless the overlap is exact and the type is the same).

In overload resolution against user-defined operators , for every type T , the following function signatures participate in overload resolution:

For every enumeration or pointer to member type T , optionally volatile-qualified, the following function signature participates in overload resolution:

For every pair A1 and A2 , where A1 is an arithmetic type (optionally volatile-qualified) and A2 is a promoted arithmetic type, the following function signature participates in overload resolution:

[ edit ] Built-in compound assignment operator

The behavior of every built-in compound-assignment expression target-expr   op   =   new-value is exactly the same as the behavior of the expression target-expr   =   target-expr   op   new-value , except that target-expr is evaluated only once.

The requirements on target-expr and new-value of built-in simple assignment operators also apply. Furthermore:

• For + = and - = , the type of target-expr must be an arithmetic type or a pointer to a (possibly cv-qualified) completely-defined object type .
• For all other compound assignment operators, the type of target-expr must be an arithmetic type.

In overload resolution against user-defined operators , for every pair A1 and A2 , where A1 is an arithmetic type (optionally volatile-qualified) and A2 is a promoted arithmetic type, the following function signatures participate in overload resolution:

For every pair I1 and I2 , where I1 is an integral type (optionally volatile-qualified) and I2 is a promoted integral type, the following function signatures participate in overload resolution:

For every optionally cv-qualified object type T , the following function signatures participate in overload resolution:

[ edit ] Example

Possible output:

[ edit ] Defect reports

The following behavior-changing defect reports were applied retroactively to previously published C++ standards.

[ edit ] See also

Operator precedence

Operator overloading

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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

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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.

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IP Address Direct Assignment

What does it mean when a "whois" report says that an IP Address is owned by CloudFlare and the "net type" is "direct assignment"? example follows:

• Did any answer help you? if so, you should accept the answer so that the question does not keep popping up forever, looking for an answer. Alternatively, you could post and accept your own answer. –  Ron Maupin ♦ Commented Dec 23, 2021 at 19:29

To quote Introduction to ARIN's Database :

Direct Assignment : IP address space assigned directly from ARIN to an organization for its own exclusive use.

So this IP space cannot be used to do sub allocations to downstream customers, that's what Direct Allocation is for.

• I believe the address 104.16.0.195 was used by Cobb County, GA last year, but it is held by CloudFlare now, and doesn't show up in viewdns.info/reverseip/?host=104.16.0.195&t=1 . Do you know how I can verify that it was (or wasn't) used by Cobb County last year? –  Dennis Commented May 12, 2021 at 23:05
• I really have no idea. ARIN has a historical whois service that may be of help: arin.net/reference/research/whowas –  Teun Vink ♦ Commented May 12, 2021 at 23:39

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Spotting issues with assignment clauses in M&A Due Diligence

Written by: Kira Systems

January 19, 2016

6 minute read

Although not nearly as complex as change of control provisions , assignment provisions may still present a challenge in due diligence projects. We hope this blog post will help you navigate the ambiguities of assignment clauses with greater ease by explaining some of the common variations. (And, if you like it, please check out our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence. )

What is an Assignment Clause?

First, the basics:

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Common Exclusions and Inclusions

Exclusion for change of control transactions.

In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in…

The examples listed above are only of five common occurrences in which an assignment provision may provide exclusions or inclusions. As you continue with due diligence review, you may find that assignment provisions offer greater variety beyond the factors discussed in this blog post. However, you now have a basic understand of the possible variations of assignment clauses. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, please download our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence.

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• Direct Methods of Assessment

Direct methods of assessment

Direct measures of student learning require students to display their achievement of student learning (knowledge and skills) as they respond to the assignment, or “instrument,” itself. Because direct measures capture what students can actually do , they are excellent for measuring levels of achievement of student learning on specific outcomes.

What are “direct” and “indirect” measures of student learning, and why do we focus on direct measures at NAU?

Adapted from Marymount University Assessment Handbook (2015), from the University of Massachusetts, Amherst “Program-Based Review & Assessment Tools & Techniques for Program Improvement,” (April 2017), and from Western Washington University’s Tools & Techniques for Program Improvement: Handbook for Program Review & Assessment of Student Learning (2006), and from Ball State University Assessment Workbook (2012)

Following are the definitions of direct and indirect measures of student learning:

Direct measures “require students to display their knowledge and skills as they respond to the instrument itself. Objective tests, essays, presentations, and classroom assignments all meet this criterion.”

Examples of Direct Measures of Student Learning from Cleveland State University Accordion Closed

• Scores and pass rates on standardized tests (licensure/certification as well as other published tests determining key student learning outcomes)
• Writing samples
• Score gains indicating the “value added” to the students’ learning experiences by comparing entry and exit tests (either published or locally developed) as well as writing samples
• Locally designed quizzes, tests, and inventories
• Portfolio artifacts (these artifacts could be designed for introductory, working, or professional portfolios)
• Capstone projects (these could include research papers, presentations, theses, dissertations, oral defenses, exhibitions, or performances)
• Case studies
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• Oral examination
• Internships, clinical experiences, practica, student teaching, or other professional/content-related experiences engaging students in hands-on experiences in their respective fields of study (accompanied by ratings or evaluation forms from field/clinical supervisors)
• Service-learning projects or experiences
• Authentic and performance-based projects or experiences engaging students in opportunities to apply their knowledge to the larger community (accompanied by ratings, scoring rubrics or performance checklists from project/experience coordinator or supervisor)
• Graduates’ skills in the workplace rated by employers
• Online course asynchronous discussions analyzed by class instructor

Indirect methods such as surveys and interviews ask students to reflect on their learning rather than to demonstrate it. From Palomba and Banta, 1999, Assessment Essentials: Planning, Implementing, and Improving Assessment in Higher Education.

Examples of Indirect Measures of Student Learning from Ball State University: Accordion Closed

• Course grades and grade distributions
• Assignment grades, if not accompanied by a rubric or scoring criteria
• Retention and graduation rates
• Admission rates into graduate programs and graduation rates from those programs
• Scores on tests required for graduate level work (such as the GRE) that evaluate skills learned over a lifetime
• Quality and reputation of graduate programs into which alumni are accepted
• Placement rates of graduates into appropriate career positions and starting salaries
• Alumni perceptions of their career responsibilities and satisfaction
• Student feedback of their knowledge and skills, and reflections on what they have learned over the course of their program
• Questions on end-of-course student evaluation forms that ask about the course rather than the instructor
• Student, alumni, and employer satisfaction with learning collected through surveys, exit interviews, or focus groups
• Student participation rates in faculty research, publications, and conference publications
• Honors, awards, and scholarships earned by students and alumni

Assessment and Grading: Why are grades indirect measures of student learning? Accordion Closed

A key part of deciding on what assessment methods to use is to know what learning outcome(s) you want to assess. With NAU’s assessment requirement, it is simple to know what to assess: each of your program’s broad learning outcomes.

Since direct measures “require students to display their knowledge and skills (Palomba and Banta, 1999, pp. 11-12),” it is the most effective way to determine student achievement of degree program learning outcomes. Direct measures ensure faculty can assess student mastery of outcomes, which is the focus for program-level learning outcomes assessment.

What is Cost Structure?

Fixed vs. variable costs, fixed costs, variable costs, direct vs. indirect costs, direct costs, indirect costs, cost allocation, example of cost allocation, the importance of cost structures and cost allocation, additional resources, cost structure.

The different types of cost structures incurred by a business

Cost structure refers to the various types of expenses a business incurs and is typically composed of  fixed and variable costs . Costs may also be divided into direct and indirect costs. Fixed costs are costs that remain unchanged regardless of the amount of output a company produces, while variable costs change with production volume.

Direct costs are costs that can be attributed to a specific product or service, and they do not need to be allocated to the specific cost object. Indirect costs are costs that cannot be easily associated with a specific product or activity because they are involved in multiple activities.

Operating a business must incur some kind of costs, whether it is a retail business or a service provider. Cost structures differ between retailers and service providers, thus the expense accounts appearing on a  financial statement  depend on the cost objects, such as a product, service, project, customer or business activity. Even within a company, cost structure may vary between product lines, divisions or business units, due to the distinct types of activities they perform.

Key Highlights

• Cost structure refers to the various types of expenses a business incurs and is typically composed of fixed and variable costs, or direct and indirect costs.
• Fixed costs are incurred regularly and are unlikely to fluctuate over time. Variable costs are expenses that vary with production output.
• Direct costs are costs that are directly related to the creation of a product and can be directly associated with that product. Direct costs are usually variable costs, with the possible exception of labor costs. Indirect costs are costs that are not directly related to a specific cost object. Indirect costs may be fixed or variable.
• Having a firm understanding of the difference between fixed and variable and direct and indirect costs is important because it shapes how a company prices the goods and services it offers.

Fixed costs are incurred regularly and are unlikely to fluctuate over time. Examples of fixed costs are overhead costs such as rent, interest expense, property taxes, and  depreciation  of fixed assets. One special example of a fixed cost is direct labor cost. While direct labor cost tends to vary according to the number of hours an employee works, it still tends to be relatively stable and, thus, may be counted as a fixed cost, although it is more commonly classified as a variable cost where hourly workers are concerned.

Variable costs are expenses that vary with production output. Examples of variable costs may include direct labor costs,  direct material cost , and bonuses and sales commissions. Variable costs tend to be more diverse than fixed costs. For businesses selling products, variable costs might include direct materials, commissions, and piece-rate wages. For service providers, variable expenses are composed of wages, bonuses, and travel costs. For project-based businesses, costs such as wages and other project expenses are dependent on the number of hours invested in each of the projects.

As alluded to earlier, direct costs are costs that are directly related to the creation of a product and can be directly associated with that product. Direct material is an example of a direct cost.

Direct costs are almost always variable because they are going to increase when more goods are produced. As discussed earlier, an exception to this is labor. Employee wages may be fixed and unlikely to change over the course of a year. However, if the employees are hourly and not on a fixed salary then the direct labor costs can increase if more products are manufactured.

Indirect costs are costs that are not directly related to a specific cost object like a function, product or department. They are costs that are needed for the sake of the company’s operations and health. Some other examples of indirect costs include overhead , security costs, administration costs, etc. The costs are first identified, pooled, and then allocated to specific cost objects within the organization.

Indirect costs may be either fixed or variable costs. An example of a fixed cost is the salary of a project supervisor assigned to a specific project. An example of a variable indirect cost would be utilities expense. This expense may fluctuate depending on production (for example, there would be an increase in utility expense if a manufacturing plant is running at a higher capacity utilization ).

Having a firm understanding of the difference between fixed and variable and direct and indirect costs is important because it shapes how a company prices the goods and services it offers. Knowing the actual costs of production enables the company to price its products efficiently and competitively.

Cost allocation is the process of identifying costs incurred, and then accumulating and assigning them to the right cost objects (e.g. product lines, service lines, projects, departments, business units, customers, etc.) on some measurable basis. Cost allocation is used to distribute costs among different cost objects in order to calculate the profitability of different product lines.

A cost pool is a grouping of individual costs, from which cost allocations are made later. Overhead cost, maintenance cost and other fixed costs are typical examples of cost pools. A company usually uses a single cost-allocation basis, such as labor hours or machine hours, to allocate costs from cost pools to designated cost objects.

A company with a cost pool of manufacturing overhead uses direct labor hours as its cost allocation basis. The company first accumulates its overhead expenses over a period of time (for example, a year) and then divides the total overhead cost by the total number of labor hours to find out the overhead cost “per labor hour” (the overhead allocation rate ). Finally, the company multiplies the hourly cost by the number of labor hours spent to manufacture a product to determine the overhead cost for that specific product line.

To maximize  profits , businesses must find every possible way to minimize costs. While some fixed costs are vital to keeping the business running, a  financial analyst  should always review the financial statements to identify possible excessive expenses that do not provide any additional value to core business activities.

When an analyst understands the overall cost structure of a company, they can identify feasible cost-reduction methods without affecting the quality of products sold or service provided to customers. The financial analyst should also keep a close eye on the cost trend to ensure stable cash flows and no sudden cost spikes occurring.

Cost allocation is an important process for a business because if costs are misallocated, then the business might make wrong decisions, such as over/underpricing a product, or invest unnecessary resources in non-profitable products. The role of a financial analyst is to make sure costs are correctly attributed to the designated cost objects and that appropriate cost allocation bases are chosen.

Cost allocation allows an analyst to calculate the per-unit costs for different product lines, business units, or departments, and, thus, to find out the per-unit profits. With this information, a financial analyst can provide insights on improving the profitability of certain products, replacing the least profitable products, or implementing various strategies to reduce costs.

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What is Cost Assignment?

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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.

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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.

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• Using Global Human Resources

Examples of Start Date Changes When Assignment Changes Exist

Let's look at some examples of when you can change a person's start date when assignment changes exist and what's the outcome of the change.

Future Assignment Changes Don't Exist

Vijay Singh is hired on 1-Jan-2010. He has no future assignment changes.

Future Assignment Changes Exist

Vijay Singh is hired on 1-Jan-2010 and has a future assignment change on 1-Jan-2011. Assignment changes include actions such as promotion, adding an assignment, and adding a temporary assignment.

Multiple Assignment Changes Exist on the Start Date

Vijay Singh is hired on 1-Jan-2010 and an assignment change was done for him on the same date.

Invalid Supervisor or Direct Reports Exist on Start Date

If the supervisors, such as line manager, project manager, and so on or any of the direct reports is invalid as of the new selected start date, then the start date change won't be allowed.

Additional Assignments Exist on the Start Date

Vijay Singh has an additional assignment added for him on 1-Feb-2010.

Vijay Singh has an additional assignment added for him on the same date as the start date.

Related Topics

• How can I correct the global transfer and global temporary assignment start dates?

After 15 years: New Securitisation regulatory framework takes effect

-Financial Services Division ( [email protected] )

[This version dated 24 th September, 2021. We are continuing to develop the write-up further – please do come back]

On September 24, 2021, the RBI released Master Direction – Reserve Bank of India Securitisation of Standard Assets) Directions, 2021 (‘Directions’) [1] . The same has been released after almost 15 months of the comment period on the draft framework issued on June 08, 2020 [2] . This culminates the process that started with Dr. Harsh Vardhan committee report in 2019 [3] .

It is said that capital markets are fast changing, and regulations aim to capture a dynamic market which quite often leads the regulation than follow it. However, the just-repealed Guidelines continued to shape and support the securitisation market in the country for a good 15 years, with the 2012 supplements mainly incorporating the response to the Global Financial Crisis (GFC).

Considering the fact that securitisation, along with its regulatory alternative (direct assignment) has become a very important channel of inter-connectivity and bridging between the non-banking finance companies and the banking sector, and since the ILFS crisis, has been almost existential for NBFCs, it is very important to examine how the new regulatory framework will support securitisation market in India.

By way of highlights:

• The bar on securitisation of purchased loans has been removed; there is a holding period requirement for acquired loans, after which the same may be securitised.
• The risk retention requirement for residential mortgage backed transactions has been reduced to 5%.
• Minimum holding period reduced to 6 months maximum, whereas it will be 3 months in case of loans with a tenure of upto 2 years.
• In line with EU and other markets, there is a new framework for simple, transparent and comparable (STC) securitisations, which will qualify for lower capital requirements for investors.
• Ratings-based risk weights introduced for securitisation transactions, adopting the ERB approach of global regulators.
• Direct assignments continue to be subjected to the familiar criteria – no credit enhancement or liquidity facility, adherence to MHP, etc. However, risk retention criteria in case of direct assignments, called Transfer of Loan Exposures, have been removed, except where the buyer does not do a due diligence for all the loans he buys.
• By defining who all could be permitted transferees of loans, the fledgling market for sale of loans through electronic platforms, to permit retail investors to participate in the loan market, completely nipped in its bud.

Scope of Applicability

Effective date:.

The Directions are applicable with immediate effect. This should mean, any transaction done or after the date of the notification of the Directions must be in compliance therewith. Para 4 of the Directions clearly provides that any transaction of securitisation “undertaken” subsequent to the notification of the Directions will have to comply with the same. This implies that 24th September is the last date for any securitisation transaction under the erstwhile Guidelines.

The immediate implementation of the new Directions may create difficulties for transactions which are mid-way. Para 4 refers to transactions undertaken after the notification date. What is the date of “undertaking” a transaction for determining the cut-off date? Quite often, securitization transactions involve a process which may be spread over a period of time. The signing of the deed of assignment is mostly the culmination of the process. In our view, if the transaction is already mid-way, and effective term sheets have been signed with investors within the 24th September, it will be improper to disrupt that which has already been structured.

Lending entities covered:

As proposed in the Draft Directions, the Directions are applicable to banks and small finance banks (excluding RRBs), all India Term financing institutions (NABARD, NHB, EXIM Bank, and SIDBI), NBFCs and HFCs. These institutions are referred to as Lenders (or Originators) herein.

Eligible Assets

What is not eligible:.

The Directions provide a negative list i.e. list of the assets that cannot be securitised. These are:

• Re-securitisation exposures;
• Structures in which short term instruments such as commercial paper, which are periodically rolled over, are issued against long term assets held by a SPE. Thus, what is globally prevalent as “asset backed commercial paper” (ABCP) has been ruled out. ABCP transactions were seen as responsible for a substantial liquidity crisis during the GFC regime, and Indian regulators seem to have shunned the same.
• Synthetic securitisation; and
• revolving credit facilities
• Restructured loans and advances which are in the specified period ; [ Notably, the Directions do not seem to define what is the “specified period” during which restructured facilities will have to stay off from the transaction. It appears that the bar will stay till the facility comes out of the “substandard” tag. This becomes clear from para 8 of the Directions.
• Exposures to other lending institutions;
• Refinance exposures of AIFIs; and
• Loans with bullet payments of both principal and interest as underlying;

The draft guidelines did not exclude 2, 3, 4(b), (c) and (d) above. It is noteworthy that the exposure to other lending institutions has also been put in the negative list. Further, synthetic securitisation, on which several transactions are based, also seems to be disallowed.

Apart from the above, all other on-balance sheet exposures in the nature of loans and advances and classified as ‘standard’ will be eligible to be securitised under the new guidelines.

With respect to agricultural loans, there are additional requirements, as prescribed in the draft directions. Further, MHP restrictions shall not be applicable on such loans.

What is not not eligible, that is, what is eligible:

It is also important to note that the bar on securitisation of loans that have been purchased by the originator goes away. On the contrary, Explanation below para 5 (l) [definition of Originator] clearly states that that the originator need not be the original lender; loans which were acquired from other lenders may also be the part of a securitisation transaction. Further, Para 9 provides that the respective originators of the said assets transferred to the instant originator should have complied with the MHP requirements, as per the TLE Directions.

At the same time, a re-securitisation is still negative listed. That is, a pool may consist of loans which have been acquired from others (obviously, in compliance with TLE Directions), but may not consist of a securitisation exposure.

Another notable structure which is possible is securitisation of a single loan. This comes from proviso to para 5 (s). This proposal was there in the draft Directions too. While, going by the very economics of structured finance, a single loan securitisation does not make sense, and reminds one of the “loan sell off” transactions prior to the 2006 Guidelines, yet, it is interesting to find this clear provision in the Directions.

Rights of underlying obligors

Obligors are borrowers that owe payments to the originator/ lender. Securitisation transactions must ensure that rights of these obligors are not affected. Contracts must have suitable clauses safeguarding the same and all necessary consent from such obligors must be obtained.

MRR Requirements

Para 14, laying down the MRR requirements, uses two terms – equity tranche and “first loss facility”. While the word “first loss facility” is defined, equity tranche is not. Para 5(h) defines “first loss facility” to include first level of financial support provided by the originator or a third party to improve the creditworthiness of the securitisation notes issued by the SPE such that the provider of the facility bears the part or all of the risks associated with the assets held by the SPE .

However, Explanation below para 14 may be the source of a substantial confusion as it says OC shall not be counted as a part of the first loss facility for this purpose.

What might be the possible interpretation of this (euphemistically termed as) Explanation? OC is  certainly a form of originator support to the transaction, and economically, is a part of the first loss support. However, first loss support may come in different ways, such as originator guarantee, guarantee from a third party, cash collateral, etc. Equity tranche, deriving from the meaning of the word “tranche” which includes both the notes as also other forms of enhancement. Therefore, what the Explanation is possibly trying to convey is that in capturing the equity or first loss tranche, which, upto 5%, has to be  originator-retained, the OC shall not be included.

This, however, does not mean that the OC will not qualify for MRR purposes. OC is very much a part of the originator’s risk retention; however, in constructuring the horizontal, vertical and L tranche of transactions, the OC shall not be considered.

To give examples:

• A transaction has 15% OC, and then a AAA rated tranche: In this case, the original has the 15% OC which meets the MRR requirement. He does not need to have any share of the senior tranches. This point, looking at the language of the Explanation, may be unclear and may, therefore, reduce the popularity of OC as a form of credit enhancement.
• A transaction as 5% OC, 5% junior tranche, and remaining 95% as senior tranche. The originator needs to hold the entire 5% junior tranche (assuming original maturity > 24 months).
• A transaction has 5% OC, 2% junior tranche, and 98% senior tranche. The originator needs to hold the entire 2% junior tranche, and 3% of the 98% senior tranche.

Para 16 first clarifies what is though clear from the 2006 Guidelines as well – that the requirement of retention of MRR through the life of the transaction does not bar amoritisation of the MRR. However, if MRR comes in forms such as cash collateral, it cannot be reduced over the tenure, except by way of absorption of losses or by way of reset of credit enhancements as per the Directions.

Listing Requirements

The Directions specify a minimum ticket size of Rs. 1 crore for issuance of securitisation notes. This would mean an investor has to put in a minimum of Rs 1 crore in the transaction. Further, the Directions also state that in case securitisation notes are offered to 50 or more persons, the issuance shall mandatorily be listed on stock exchange.

Interestingly, the limit of 50 persons seems to be coming from the pre-2013 rules on private placements; the number, now, is 200. It is typically unlikely that securitisation transactions have 50 or more investors to begin with. However, recently, there are several portals which try to rope in non-traditional investors for investing in securitisation transactions. These portals may still do a resale to more than 50; it is just that the number of investors at the inception of the transaction cannot be more than 49. Also, if there are multiple issuances, the number applies to each issuance. The number, of course, has to be added for multiple tranches.

The Draft Directions stated a issuance size based listing requirement in case of RMBS, as against the investor group size based requirement prescribed in the Directions.

SPE requirements

SPE requirements are largely routine. There is one point in para 30 (d) which may cause some confusion – about the minimum number of directors on the board of the SPE. This is applicable only where the originator has the right of nominating a board member. If the originator has no such right, there is no minimum requirement as to the board of directors of the SPE. In any case, it is hard to think of SPEs incorporated in corporate form in India.

Accounting provisions

The Directions give primacy to accounting standards, as far as NBFCs adopting IndAs are concerned. In such cases, upfront recognition of profit, as per “gain on sale” method, is explicitly permitted now. As for other lenders too, if the gain on sale is realised, it may be booked upfront.

Unrealised gains, if any, should be accounted for in the following manner:

• The unrealised gains should not be recognised in Profit and Loss account; instead the lenders shall hold the unrealised profit under an accounting head styled as “ Unrealised Gain on Loan Transfer Transactions ”.
• The profit may be recognised in Profit and Loss Account only when such unrealised gains associated with expected future margin income is redeemed in cash. However, if the unrealised gains associated with expected future margin income is credit enhancing (for example, in the form of credit enhancing interest-only strip), the balance in this account may be treated as a provision against potential losses incurred.
• In the case of amortising credit-enhancing interest-only strip, a lender would periodically receive in cash, only the amount which is left after absorbing losses, if any, supported by the credit-enhancing interest-only strip. On receipt, this amount may be credited to Profit and Loss account and the amount equivalent to the amortisation due may be written-off against the “ Unrealised Gain on Loan Transfer Transactions ” account bringing down the book value of the credit-enhancing interest-only strip in the lender’s books.
• In the case of a non-amortising credit-enhancing interest-only strip, as and when the lender receives intimation of charging-off of losses by the SPE against the credit-enhancing interest-only strip, it may write-off equivalent amount against “Unrealised Gain on Loan Transfer Transactions” account and bring down the book value of the credit-enhancing interest-only strip in the lender’s books. The amount received in the final redemption value of the credit-enhancing interest-only strip received in cash may be taken to the Profit and Loss account.

STC securitisations

Having a simple, transparent and comparable (STC) label for a securitisation transaction is a very important factor, particularly for investors’ acceptability of the transaction. Securitisation transactions are structured finance transactions –the structure may be fairly complicated. The transaction may be bespoke – created with a particular investor in mind; hence, the transaction may not be standard. Also, the transaction terms may not have requisite transparency. [4]

Simple transparent and comparable securitisations qualify for relaxed capital requirements. STC structures are currently prevalent and recognised for lower capital requirements in several European countries. The transactions are required to comply with specific guidelines in order to obtain a STC label. The Basel III guidelines set the STC criteria for the purpose of alternative capital treatment.

The STC criteria inter-alia provides for conditions based on asset homogeneity, past performance of the asset, consistency of underwriting etc.The Para 37 of the Directions provides that securitisations that additionally satisfy all the criteria laid out in Annex 1 of the Directions can be subject to the alternative capital treatment. The criteria mentioned in the Directions are at par with requirements of Basel III regulations.

Investors to the STC compliant securitisation are allowed relaxed risk-weights on the investment made by them.

The Directions further require, originator to disclose to investors all necessary information at the transaction level to allow investors to determine whether the securitisation is STC compliant.

STC criteria need to be met at all times. Checking the compliance with some of the criteria might only be necessary at origination. .In cases where the criteria refer to underlying, and the pool is dynamic, the compliance with the criteria will be subject to dynamic checks every time that assets are added to the pool.

Facilities supporting securitisation structures

A securitisation transaction may have multiple elements – like credit enhancement, liquidity support, underwriting support, servicing support. These are either provided by the originator itself or by third parties. The Directions aim to regulate all such support providers (“Facility Providers”).  The Directions require the Facility Providers to be regulated by at least one financial sector regulator. For this purpose, in our view, RBI, IRDAI, NHB, SEBI etc. may be considered as financial sector regulators.

Common conditions for all Facilities

For provision of any of the aforesaid facilities, the facility provider must fulfill the following conditions:

• Proper documentation of the nature, purpose, extent of the facility, duration, amount and standards of performance
• Facilities to be clearly demarcated from each other
• On arm’s length basis
• The fee of the Facility Provider should not be subject to subordination/waiver
• No recourse to Facility Provider beyond the obligations fixed in the contract
• Facility Provider to obtain legal opinion that the contract does not expose it to any liability to the investors

Credit Enhancement Facilities

In addition to the above mentioned conditions, following conditions must be fulfilled by the Facility Provider:

• To be provided only at initiation of transaction
• Must be available to SPV at all times
• Draw downs to eb immediately written-off

Liquidity facilities

The provisions about liquidity facilities are substantially similar to what they have been in the 2006 Guidelines. However, the provisions of 2006 Guidelines and the Draft Directions requiring co-provision of liquidity facility to the extent of 25% by an independent party have been omitted. This would mean, the originator itself may now be able to provide for the liquidity facility if an independent party could not be identified or in any other case.

Underwriting facilities

Underwriting is hardly common in case of securitisations, as most issuances are done on bespoke, OTC basis. Again, most of the provisions in the Directions relating to underwriting are similar to the 2006 Guidelines with one difference. The 2006 Guidelines required Originators (providing underwriting facilities) to reduce Tier 1 and Tier 2 capital by the amount of holdings (if it is in excess of 10% of the issue size) in 50-50 proportion.

The Directions are silent on the same.

Servicing facilities

Third party service providers have started emerging in India, particularly by way of  necessity (forced by events of default  of certain originators) rather than commercial expediency.

The provisions of the Directions in para 59-60 are applicable even to proprietary servicing, that is, the originator acting as a servicer, as well as a third party servicer.

It is important to note that arms’ length precondition [Para 45 (b) ] is applicable to originator servicing too. Hence, if the servicing fees are on non-arms’ length terms, this may certainly amount to a breach of the Directions. The other requirement of para 45 (e) seems also critical – the payment of servicing fee should not be subordinated. There should not be any bar on structuring a servicing fee in two components – a fixed and senior component, and an additional subordinated component. This is common in case of third party servicers as well.

Lenders who are investors

The meaning of “lenders” who are investors, in Chapter V, should relate to the entities covered by the Directions, that is, banks, NBFCs, HFCs and term lending institutions, who are investing money into securitisation notes. Obviously, the RBI is not meant to regulate other investors who are outside RBI’s regulatory ambit. The part relating to stress testing was there in the earlier Guidelines too – this finds place in the Directions.

It is also made clear that the investors’ exposure is not on the SPE, but on the underlying pools. Hence, the see-through treatment as given in Large Exposures Framework applies in this case.

Capital requirements

Capital has to be maintained in all securitisation exposures, irrespective of the nature of the exposure an entity is exposed to. If the securitisation transaction leads to any realised or unrealised gain, the same must be excluded from the Common Equity Tier 1 or Net owned Funds, and the same must be deferred till the maturity of the assets.

Further, if an entity has overlapping exposures, and if one exposure precludes the other one by fulfilment of obligations of the former, then the entity need not maintain capital on the latter. For example, if an entity holds a junior tranche which provides full credit support to a senior tranche, and also holds a part of the senior tranche, then its exposure in the junior tranche precludes any loss from the senior tranche. In such a situation, the entity does not have to assign risk-weights to the senior tranche.

For the liquidity facilities extended in accordance with Chapter IV of the Directions , capital can be maintained as per the External Rating Based Approach (which has been discussed later on). For liquidity facilities not extended in accordance with Chapter IV of the Directions, capital charge on the actual amount after applying a 100% CCF will have to be considered.

Derecognition of transferred assets for the purpose of Capital Adequacy

  The Directions has laid down clear guidelines on derecognition of transferred assets for capital adequacy, and has no correlation with accounting derecognition under Ind AS 109. Therefore, irrespective of whether a transaction achieves accounting derecognition or not, the originator will still be able to enjoy regulatory capital relief so long as the Directions are complied with.

There is a long list of conditions which have to be satisfied in order achieve derecognition, which includes:

• It is able to repurchase the exposures from the SPE in order to realise the benefits, or
• It is obligated to retain the risk of the transferred exposures.
• The originator should not be able to repurchase the exposure, except for clean-up calls.
• The transferred exposures are legally taken isolated such that they are put beyond the reach of the creditors in case of bankruptcy or otherwise.
• The securitisation notes issued by SPE are not obligations of the originator.
• The holders of the securitisation notes issued by the SPE against the transferred exposures have the right to pledge or trade them without any restriction, unless the restriction is imposed by a statutory or regulatory risk retention requirement
• The threshold at which clean-up calls become exercisable shall not be more than 10% of the original value of the underlying exposures or securitisation notes.
• Exercise of clean-up calls should not be mandatory.
• The clean-up call options, if any, should not be structured to avoid allocating losses to credit enhancements or positions held by investors or otherwise structured to provide credit enhancements
• The originators must not be obligated to replace loans in the pool in case of deterioration of the underlying exposures to improve the credit quality
• The originator should not be allowed to increase the credit enhancement provided at the inception of the transaction, after its commencement.
• The securitisation does not contain clauses that increase the yield payable to parties other than the originator such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying pool
• There must be no termination options or triggers to the securitisation exposures except eligible clean-up call options or termination provisions for specific changes in tax and regulation

Further, a legal opinion has to be obtained confirming the fulfilment of the aforesaid conditions.

The draft directions issued some quantitative conditions as well, which have been dropped from the final Directions.

Securitisation External Ratings Based Approach

  The Directions require the lenders to maintain capital as per the ERBA methodology. Where the exposures are unrated, capital charge has to be maintained in the actual exposure.

Para 85 signifies that the maximum capital computed as per the ERBA methodology will still be subject to a cap of the capital against the loan pool, had the pool not been securitised.

The maximum risk weight prescribed in the ERBA approach is 1250%, which holds good for banks, as they are required to maintain a capital of 8%. For NBFCs, the capital required is 15%, so the maximum risk weight should not have been more that 667%. However, para 85 should take care of this anomaly which limits the capital charge to the capital against the loan pool, had the pool not been securitised.

Investor disclosures

Disclosures, both at the time of the issuance, and subsequent thereto, form an important part of the Directions. A complete Chapter (Chapter VII) is dedicated to the same. The disclosures as laid in Annexure 2 are to be made at least on half yearly basis throughout the tenure of the transaction.

This includes substantial pool- level data- such as a matrix of % of the pool composition and corresponding maturities, weighted average, minimum and maximum MHP, MRR and its composition broken down into types of retention, credit quality of the pool (covering overdue, security related details, rating, distribution matrix of LTVs, Debt-to-Income ratios, prepayments etc.), distribution of underlying loan assets based on industry, geography etc.

[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/85MDSTANDARDASSETSBE149B86CD3A4B368A5D24471DAD2300.PDF

[2] https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/STANDARDASSETS1600647F054448CB8CCEC47F8888FC78.PDF

[3] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48106

[4] Our write-up on STC criteria can be viewed here; https://vinodkothari.com/2020/01/basel-iii-requirements-for-simple-transparent-and-comparable-stc-securitisation/

Refer our write-up on guidelines for transfer of loan exposures here-  https://vinodkothari.com/2021/09/rbi-norms-on-transfer-of-loan-exposures/

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