In order to encourage non-banking financial companies (NBFCs) to securitise more of their assets and improve liquidity, the Reserve Bank of India (RBI) on Thursday halved the minimum holding period of their loans of above five years.
According to the revised norms, loans of original maturity of more than five years can be securitised after receiving the repayment of six-month instalments or two quarterly instalments.
Earlier the norm was to ensure that the loans are serviced for 12 monthly instalments or four quarterly installments.
An NBFC originating a loan requires to hold it for a certain period on its books before selling it to a bank or other entity. The minimum holding period is to ensure that the loan is serviced regularly in this period before the NBFC can sell it to others.
This ensured that the NBFC was liable for the asset quality of the loan.
Relaxing the norms would mean the NBFC will have to ensure the loan is serviced for only six months rather than a year earlier.
This may increase the risk of asset quality in the purchaser accounts, mainly banks, but the NBFC can turn the loans around faster to get liquidity.
The sector is going through a rough patch after the IL&FS group started defaulting on its bonds. NBFCs are struggling to raise funds from banks and other investors as a crisis of confidence has emerged in the market place.
However, public sector banks, including State Bank of India and Union Bank of India, have increased their securitisation purchase/loan buying, which is helping the NBFC sector greatly. SBI has increased its securitsation purchase kitty to Rs 450 billion from Rs 150 billion earlier.
Vibhor Mittal, head of structured finance rating, ICRA, said the benefit from relaxing norms would be seen for mortgage (home loans and loans against property). There is a healthy appetite for home loans. First, these loans have low delinquency, and, second, it is seen as retail portfolio acquisition and not an exposure to entity (HFC or finance company) selling loans. With the RBI allowing NBFCs to quickly securitise their holdings, NBFCs can tap into these new funds from banks. However, the central bank also increased the Minimum Retention Requirement for such securitisation, or assignment transactions, to 20 per cent of the book value of the loans being securitised, or 20 per cent of the cash flows from the assets assigned. This was earlier 5-10 per cent.
This means even if NBFCs get quick cash they will have to keep a greater share of the assets in their books, to have a better skin in the game, said a senior NBFC executive.
“This means that the RBI is trying to make life easier for NBFCs, but is urging them to be more responsible,” said the executive.