The Reserve Bank of India (RBI) has imposed a monetary penalty of ₹59.20 lakh (Rupees Fifty-Nine lakh twenty thousand only) on IndusInd Bank Limited (the bank) for non-compliance with certain provisions of directions issued by RBI on ‘Interest Rate on Deposits’ and ‘Securitisation of Standard Assets’.
The penalty was imposed because:
(i) The bank paid interest on deposits held in certain current accounts; and
(ii) The bank undertook activities in the nature of ‘Synthetic Securitisation’.
The banks don’t pay interest on current accounts. Interest is paid only on savings accounts and fixed deposits. RBI imposed penalty as IndusInd Bank paid interest on current accounts.
Let’s understand what is Synthetic Securitisation?
Synthetic securitisation is a method where a bank transfers the credit risk of a loan or pool of loans to another party without actually transferring the loans themselves.
In simple words:
Normal securitisation = loans/assets are transferred.
Synthetic securitisation = only the credit risk is transferred; the loans remain with the bank.
Simple Example
Suppose IndusInd Bank has a portfolio of loans worth ₹1,000 crore. The bank wants to reduce the risk that borrowers may default. Instead of selling these loans to another entity, the bank enters into an arrangement where another party agrees to bear the losses if borrowers default.
For example:
- Bank retains the ₹1,000 crore loans.
- Another investor/party agrees to absorb, say, the first ₹100 crore of credit losses.
- If borrowers default and losses occur, that investor bears the agreed losses.
- The bank has therefore transferred the credit risk, while the loans remain on its books.
This is called synthetic securitisation.
Why is it called “Synthetic”?
It is called synthetic because the securitisation is created through a financial arrangement/contract rather than an actual sale of the underlying assets.
The underlying loans don’t physically move from the bank’s balance sheet. Instead, the risk associated with those loans is transferred.
Normal vs Synthetic Securitisation
| Normal Securitisation | Synthetic Securitisation |
|---|---|
| Assets/loans are transferred | Loans remain with the bank |
| Credit risk is transferred | Credit risk is transferred |
| Ownership/economic interest may be transferred | Only risk is primarily transferred |
| Actual asset sale/transfer involved | Usually uses credit protection arrangements |
