RBI tightens norms for securitisation of loans by NBFCs

Reserve Bank of India (RBI) on Tuesday tightened the non-banking finance company (NBFC) securitisation norms by stipulating that a non-banking finance company will have to retain at least 5 per cent of the loan being sold to another entity.

The revised guidelines, issued by the RBI also stipulate that NBFC cannot sell or securitise a loan unless three monthly instalments have been paid by the borrower. These stipulations, the central bank said are aimed at checking "unhealthy practices" and distributing risk to a wide spectrum of investors.

Giving details of the guidelines, RBI said a loan up to two years can be securitised only after payment of three monthly instalments by the borrower. The limit for loans between two and five years is six monthly instalments and above five years, 12 monthly instalments.

With regard to minimum retention requirement (MRR) for securitisation, the guidelines said the NBFCs selling loans will have to retain five per cent of the amount if the loan is for less than two year period and 10 per cent if it is of over two years.

The originating NBFCs, it said should disclose to investors the weighted average holding period of the assets securitised and the level of their MRR in the securitisation. They should also ensure prospective investors have readily available access to all materially relevant data on the credit quality and performance of the individual underlying exposures, cash flows and collateral supporting a securitisation exposure, RBI said.

According to the guidelines, NBFCs should formulate policies regarding the process of due diligence to be exercised by their own officers to satisfy about the Know Your Customer requirements and credit quality of the underlying assets. RBI also said NBFCs will not be permitted to carry out re-securitisation of assets and synthetic securitisation, which refers to bundling of assets with different risk profile. These guidelines have to implemented by NBFCs in two phases by October end.

Earlier, the RBI had issued similar guidelines with regards to securitisation of loans by banks.