Securitisation to be key for small finance banks: Moody's

Says development of domestic securitisation markets will help both India and China achieve objective of financial inclusion

The upcoming small finance banks will take time to develop a retail deposit franchise and securitisation of loans will be instrumental for their development, Moody's Investors Service said on Thursday.

In both India and China, securitisation is an important funding tool for NBFCs, which in turn lends to under-served individuals, micro enterprises and SMEs, it said in a report.

The Reserve Bank on India in September 2015 granted in-principle approval to 10 entities, including eight micro-finance institutions (MFIs), to operate as small finance banks. "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.

"At the same time, NBFCs and MFIs will continue to fund through securitisation as the sector grows," Moody's said.

The development of domestic securitisation markets will help both India and China achieve the objective of financial inclusion, it added. Securitisation refers to a pooled group of financial assets or loans that together create a new security, which is then marketed and sold to investors.

With the aim of promoting financial inclusion to 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. Moody's said, till recently, policies to promote financial inclusion in India had mainly focused on bringing individuals into the ambit of formal financial institutions.

However, in recent years, the focus has broadened to include improving the availability of credit to micro small and medium enterprises (MSMEs).

In both India and China, non-bank finance companies (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 costs for such loans, said Georgina Lee, Moody's Assistant Vice President.

"While there are various funding avenues open to 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," Lee said.