Archive for month: November, 2018

By Financial Services Division, finserv@vinodkothari.com

 

In the wake of the recent hues and cries of the entire country in anticipation of a liquidity crisis in the NBFC sector, the Reserve Bank of India, on 29^th November, 2018, issued a notification[1] to modify the Securitisation Guidelines.The amendment aims to relax the minimum holding period requirements of the guidelines, subject to conditions, temporarily. Therefore, the changes vide this notification come with an expiry date. The key takeaways of the notification have been discussed below:

a. Relaxation in the MHP requirements: As per the notification, NBFCs will now be allowed to securitise/ assign loans originated by them, with original maturity of more than 5 years, after showing record of recovery of repayments of six monthly instalments or two quarterly instalments (as applicable). Currently, for loans with original maturity more than 5 years, the MHP requirements are repayment of at least twelve monthly instalments or four quarterly instalments (as applicable).

b. Change in MRR requirements for the loans securitised under this notification: The benefit mentioned above will be available only if the NBFC retains at least 20% of the assets securitised/ assigned. Currently, the MRR requirements ranges between 5%-10% depending on the tenure of the loans.

c. Timeline for availing this benefit: As already stated above, this is a temporary measure adopted by the RBI to ease out the tension relating to liquidity issues of the NBFCs; therefore, this comes with an expiry date, which in the present case is six months from the date of issuance of the notification. Therefore, this benefit will be available for only those loans which are securitised/ assigned during a period of six months from the date of issuance of this notification.

The requirements under the guidelines remains intact.

Further, the RBI has extended the relaxation till December 31, 2019 vide its notification dated May 29, 2019.

To summarise, the MHP requirements and the MRR requirements on securitisation/ assignment of loans looks as such –

	Loans assigned between 29th November, 2018 – 30th December, 2019	Loans assigned after 31st December, 2019
MHP requirements for loans with original maturity less than 5 years	Loans upto 2 years maturity – 3 months   Loans between 2 – 5 years – 6 months	Loans upto 2 years maturity – 3 months   Loans between 2 – 5 years – 6 months
MHP requirements for loans with original maturity less than 5 years	If revised MRR requirements fulfilled – 6 months   If revised MRR requirements not fulfilled – 12 months	Loans upto 2 years maturity – 3 months   Loans between 2 – 5 years – 6 months
MRR requirements for loans with original maturity of less than 5 years	Loans with original maturity upto 2 years – 5%   Loans with original maturity more than 2 years – 10%	Loans with original maturity upto 2 years – 5%   Loans with original maturity more than 2 years – 10%
MRR requirements for loans with original maturity of more than 5 years	If benefit of MHP requirements availed – 20%   If benefit of MHP requirements not availed – 10%	Loans with original maturity upto 2 years – 5%   Loans with original maturity more than 2 years – 10%

 

Vinod Kothari comments: 

•  Loans with original maturity of more than 5 years are essentially home loans and LAP loans. Home loans are housed mostly with HFCs. These guidelines ought to have come from NHB rather than RBI, but given the tradition that RBI guidelines are followed in case of HFCs as well, this “relaxation” will be more applicable to HFCs rather than NBFCs.
• In case of LAP loans, given the current credit scenario prevailing in the country, taking exposure on LAP loans itself is subject to question. Issue is – will the relaxation prompt NBFCs to write LAP loans, or will it simply allow them to package and sell existing pools of lap loans sitting on their books waiting for the MHP of 12 months to get over? It is more likely to be latter than the former.
• However, the so-called relaxation comes with a give-and-take – the MRR is 20%. The NBFC has, therefore, 2 options – wait for 12 months to be over and just do a transaction with 10% MRR, or avail the so-called relaxation and put in on-balance funding of 20%. Therefore, it is only for those who are desperate for refinancing that the so-called relaxation will seem appealing.
• 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. Therefore, for more than 6 months and less than 12 months seasoned LAP pools, this might provide a temporary packaging opportunity.
• This is indeed the best time to think of covered bonds. The proposition has been lying unresolved for last few years. If banks are willing to take exposure on pools, why not dual recourse by way of covered bonds? That indeed provides ideal solution, with ring fenced pools providing double layers of protection.

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[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11422&Mode=0

For more articles on Securitisation and Covered Bonds, refer our page here.

Also refer our article: The name is Bond. Covered Bonds.