RBI temporarily relaxes the Guidelines on Securitisation for NBFCs

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 29th 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.

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

Loans assigned between 29th November, 2018 – 28th May, 2019 Loans assigned after 29th May, 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.

[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.

 

Indian securitisation market remains stagnant as PSLCs rule the market

Despite the economic slowdown due to GST, the Indian securitization market has performed fairly well, though it has not been able to match the volume of last year. During FY 17-18, the overall volume of the market stood at Rs. 84,000 crores, which is Rs. 1000 crores less than what happened a year back. Of the total volume, there were direct assignments worth Rs. 49000 crores and the remaining were pass through certificates. After the introduction of the securitization distribution tax in 2012, the market shifted towards DAs and the same continued until 2016 when the same was removed. This also reduced the gap between DAs and PTCs, however, the gap has increased once again. The following two graphics show the trend of securitization and the market composition (DAs vs PTCs) during the last few years.

The market showed a 72% YoY growth on issuance of pass through certificates from Rs 25000 crores in FY16 to Rs 43000 crores in FY17 however, and a 24% decrease in FY18 to Rs 34800 crores. The slowdown in securitisation was mainly due to lack of clarity surrounding incidence of Goods & Services Tax on the ‘assignment’ of secured loan receivables as well as a sharp spike in PLCS lending volume.

The volume of PSLC market leapfrogged to around Rs 1.84 lakh crore in FY18 from mere Rs 50,000 crore in FY17. Trading of PSLC was introduced in 2016 and FY18 was the first full year of its use. Here, banks needed to meet priority sector loan targets buy the priority sector obligation certificate from the seller bank without the transfer of risks or loan assets. Seller banks earn a fee without reduction in the loan portfolio unlike in securitization or direct assignment deals. The PLCS are also easier to execute as happens without any real transfer of assets whereas PTCs require pooling of assets and selling it.

Despite a slowdown in the market, several new asset classes were tried during the year. For the first time, asset classes like educational loans, consumer durable loans were tried. The market also witnessed return of Collateralised Loan Obligations.

7th Securitisation Summit, 2018 & 2nd Indian Securitisation Awards

Vinod Kothari Consultants, along with the Indian Securitisation Foundation, has also announced the 7th Securitisation Summit, 2018 on 25th May, 2018 at World Trade Center, Mumbai. This is an industry forum where stakeholders from the entire industry gather to discuss various issues concerning the market and try to take up issues with the regulatory authorities so as to make the environment facilitating in India. The details of the event can be viewed at: www.vinodkothari.com/secsummit/

Also, during this years’ summit, Indian Securitisation Foundation will also announce the second edition of the Indian Securitisation Awards. There are five categories award – most innovative deal of the year, large and small arrangers of the year, trustee of the year and law firm of the year.  Details can be viewed at:

http://vinodkothari.com/wp-content/uploads/2018/04/INDIAN-SECURITISATION-AWARDS-2018-BROCHURE.pdf

Despite economic slowdown due to GST, the Indian securitization market performed fairly well