Securitisation of loans key to develop small banks: Moody's

While non-banking finance companies (NBFCs) in India will continue to fund through securitisation, the practice of pooling of loans will be key for developing small finance banks, Moody's Investors Service said on Thursday.

"Securitisation will continue to be instrumental for these small Indian finance banks, as it will take time for them to develop a retail deposit franchise," the American agency said in a report here.

Securitisation involves pooling of financial assets or loans together to create a new security, which is then sold to investors.

"At the same time, NBFCs and MFIs (micro-finance institutions) will continue to fund through securitisation as the sector grows," Moody's said.

The Reserve Bank of India in September 2015 granted in-principle approval to 10 entities, including eight MFIs, to operate as small finance banks.

"With the aim of promoting financial inclusion to the under-served segment, the small finance banks will accept deposits and extend credit to marginal farmers and small business units. Their mandate overlaps with the target market of MFIs," the report added.

In both India and China, NBFCs are key providers of credit to individuals and small businesses that would otherwise have limited access to bank loans or would incur high interest for such loans, Moody's said.

"While there are various funding avenues open to the NBFCs in India and China, securitisation has proven to be reliable and competitively priced, and is therefore an important source of the funds the NBFCs use for lending," said Moody's assistant vice president Georgina Lee.

According to the US consultancy firm, the development of domestic securitisation markets will help both India and China achieve the objective of financial inclusion.