Minimum Retention Requirement (MRR)

## What it is When a bank or NBFC bundles loans — home loans, vehicle loans, microfinance — and sells them to investors as securitised instruments (PTCs), there's a danger: if the originator offloads *everything*, it has no reason to care whether the borrowers actually repay. The Minimum Retention Requirement fixes this by forcing the originator to keep a minimum slice of the same pool on its own balance sheet. Because it still holds risk, it has "skin in the game" and an incentive to originate good-quality loans and service them well.

## Why it exists MRR is a direct lesson from the 2008 global financial crisis, where US lenders originated subprime mortgages purely to sell them on, with no retained risk — leading to a flood of bad loans dressed up as safe securities. Retention rules re-align the originator's interest with the buyers' interest.

## The Indian framework The RBI's Master Direction on Securitisation of Standard Assets (2021) sets India's rules. The originator must satisfy both a Minimum Retention Requirement (MRR) and a Minimum Holding Period (MHP):

- MRR is typically 5% of the book value of the securitised loans (often 10% for loans with tenor above 24 months / certain longer-dated pools), retained continuously and not hedged away. - MHP requires the originator to have held the loans on its books for a minimum period before securitising them — preventing immediate "originate-to-distribute" churn.

These rules cover both pass-through certificate (PTC) securitisations and direct assignment transactions, which are a major funding route for Indian NBFCs and housing-finance companies.

## Why it matters to investors If you invest in securitised debt (PTCs) or in the NBFCs/HFCs that originate them, MRR is a quality safeguard: the originator's retained tranche absorbs early losses and signals confidence in the pool. A robust MRR/MHP regime makes Indian securitisation — a large and growing market that channels retail credit — far safer than the pre-2008 US model.

Takeaway: MRR ensures the lender that made the loans can't fully walk away from the consequences, aligning incentives and protecting investors who buy the resulting securities.