RBI Bi-monthly Credit Policy: NBFCs moved to a ratings-based risk weight regime

By Finacial Services Division (finserv@vinodkothari.com)

The RBI’s Statement on Developmental and Regulatory Policies dated February 1, 2019 proposes that henceforth, bank lending to NBFCs will be risk-weighted based on the Basel II risk weights, based on the rating of the NBFC in question. This facility was earlier available only to asset finance companies, and has now been proposed to be extended to all NBFCs, excluding core investment companies (CICs). The likely impact of this new dispensation may be to encourage banks  to lend to NBFCs other than the asset finance companies, such as those focusing on loans against properties, personal loans, or loans other than to productive assets. This measure may be aimed at easing the present liquidity strain affecting the NBFC sector, though, it is not sure whether the lower risk weight itself will be a strong motivator for banks to consider lending to NBFCs. Read more

Year of Direct Assignments: Volumes surge as NBFCs loan-sell as the way

By Vineet Ojha (finserv@vinodkothari.com)

Financial year ending 2019 saw a sharp surge and a life time high in the volume of securitisation/ direct assignment transactions in the economy. Consequent to the funding problems that the NBFC and HFCs have been facing over the last few months, direct assignment 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 FY2019. Of this, around Rs 73,000 crore was raised by NBFCs and HFCs through sell-down of their retail and 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 securitisation market is likely to remain strong in the current fiscal as it is emerging as an important tool for retail focussed 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:

Why the sudden surge?

Looking at the figure above, we can see a sharp surge in the DA volumes in FY19. Majority of the issuance comes from Q3 in the year with around Rs. 73,000 crores. Although the major driver is the IL&FS imbroglio, it is not the only reason for this development.

IL&FS crisis:

Following the IL&FS crisis, the 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/ HFCs, the banks have shown more interest on 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 was the relaxation of the minimum holding period (MHP) criteria for long-tenure loans by the RBI. This increased the quantum of assets eligible for securitisation in the system. The motivation was the same, to encourage NBFCs and HFCs to securitise their assets to meet their liquidity requirements. You can read more about the same in our article here.

Effects of Securitisation

Primarily, PLS requirements were the primary drivers for securtisation. 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’s not a rosy picture allover. Due to the implementation of IFRS, upon derecognized 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.

Conclusion

The securitisation 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 2 reasons – one, India’s market has so far been largely irrelevant for the global investors, and secondly, bulk of the market has still been driven by priority sector lending (PSL) requirements. PSL-based securitisations 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 originiators (and other potential investors) to enter into securitization transactions.

Reprieve for banks and NBFCs

One-time restructuring of stressed MSME accounts

By Simran Jalan (simran@vinodkothari.com)

Introduction

The Non-Performing Asset (NPA) rates in the Micro, Small and Medium Enterprises (MSMEs) segment have remained stable and range bound. In the Micro segment the NPA rate has moved from 8.9%[1] in March, 2017 to 8.8% in March, 2018. In SME segment, the NPA rate hovered between 11.4% in march, 2017 to 11.2% in March, 2018. Recognised NPA exposure for MSMEs is Rs. 81,000 crores as on March, 2018. While the growth in the NPA rate has moderated, it is too early to conclude that the NPA problem is close to bottoming out.

The RBI, in its board meeting held on November 19, 2018[2], was advised by the Board to consider a scheme of restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs. 25 crores, subject to such conditions as are necessary for ensuring financial stability.

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Accounting for Direct Assignment under Indian Accounting Standards (Ind AS)

By Team IFRS & Valuation Services (ifrs@vinodkothari.com) (finserv@vinodkothari.com)

Introduction

Direct assignment (DA) is a very popular way of achieving liquidity needs of an entity. With the motives of achieving off- balance sheet treatment accompanied by low cost of raising funds, financial sector entities enter into securitisation and direct assignment transactions involving sale of their loan portfolios. DA in the context of Indian securitisation practices involves sale of loan portfolios without the involvement of a special purpose vehicle, unlike securitisation, where setting up of an SPV is an imperative.

The term DA is unique to India, that is, only in Indian context we use the term DA for assignment of loan or lease portfolios to another entity like bank. Whereas, on a global level, a similar arrangements are known by various other names like loan sale, whole-loan sales or loan portfolio sale.

In India, the regulatory framework governing Das and securitisation transactions are laid down by the Reserve Bank of India (RBI). The guidelines for governing securitisation structures, often referred to as pass-through certificates route (PTCs) were issued for the first time in 2006, where the focus of the Guidelines was restricted to securitisation transactions only and direct assignments were nowhere in the picture. The RBI Guidelines were revised in 2012 to include provisions relating to direct assignment transactions.

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SEBI extends disclosure related exemption to eligible NBFCs & HFCs

-Amends Reg. 29 (4) of SAST Regulations, 2011 dealing with disclosures relating to pledge

By Simran Jalan (simran@vinodkothari.com)

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations) provides requirement in relation to manner of acquisition, takeover, disclosure requirements, acquisitions triggering open offer etc. It is a common phenomenon to pledge the shares of a listed entity as a security for availing of loan from Banks, financial institutions.

In line with the approval granted by SEBI in its Board meeting held on December 12, 2018[1] SEBI issued SEBI (Substantial Acquisition of Shares and Takeovers) (Third Amendment) Regulations, 2018[2] on December 28, 2018 (‘Amendment Regulations’) exempting certain class of NBFCs and HFCs from the requirement of disclosing acquisition (resulting from encumbrance) and disposal (resulting from release of encumbrance). This article discusses the impact of the said amendment.

The Amendment Regulations are effective from December 31, 2018.

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Comprehending Other Comprehensive Income (OCI) from NBFC’s Perspective