NBFC

RBI issued Guidelines on Relaxation in Securitization Transaction for NBFCs

RBI relaxes norms on securitization transaction for NBFCs. This move will ease the stress in the NBFC sector in India. Non-Banking Financial Companies (NBFCs) are allowed to securitize loans having a maturity period of more than five years after holding them on their books for a period of six months. For availing these relaxed norms, Minimum Retention Requirement (MRR) has been also prescribed by the RBI for NBFCs.

In the NBFC sector, due to the recent hues and cries of the liquidity crisis, recently on 29th November 2018, Reserve Bank of India issued notification regarding “Relaxation in the securitization transaction for NBFCs”. As per which the Minimum Holding Period (MHP) requirement has been relaxed in respect of loans having a maturity period of above 5 years. This has been done to encourage Non-Banking Financial Companies (NBFCs) to securitize their eligible assets and improve liquidity.

As per the notification, loans can be securitized having maturity period of more than 5 years once a repayment of 6 monthly installments or 2 quarterly installments have been received subject to the following requirement

Read our article:NBFC Concerns: What are the Major Concerns of NBFC Sector

It has been clarified by the RBI that it shall be applicable to transactions carried out during a period of 6 months from the date circular is issued.

Through such relaxation, NBFCs would have to ensure that loan is serviced for a period of 6 months in place of 12 months and it will allow NBFCs quicker turnaround time for loans. However, with this changing risk of asset quality may be increased in purchaser account (like banks) but in order to get the liquidity NBFC can turn the loans around faster.

What was the Earlier Norm Regarding the Securitization Transaction for NBFCs?

Previously, it has to be ensured that loans are serviced for 12 monthly installments or 4 quarterly installments now the time period has been reduced by the RBI.

Besides this, Minimum Retention Requirement has been also increased by the RBI for such securitization to 20 percent of the book value of the loans being securitized / 20 percent of the cash flows from the assets assigned which was 5-10 percent prior to such norms.

Define the Minimum Holding Period.

Prior to selling the loan to a bank or other business entity, an NBFC originating a loan has to hold it on its books for a certain period. Minimum holding period ensures that in such period loan is serviced on a regular basis prior to the selling it to others by NBFC. It ensures that for the asset quality of the loan NBFC was liable.

Why this change has been introduced by RBI?

As we can see that in India NBFC sector is going through a rough patch and in the deep struggle of raising funds from banks as well as other investors. The reason behind the lack of confidence emerged in the market is the defaults made by IL&FS group on its bonds.

In India, NBFCs which are also known as shadow banks were facing stress on their balance sheets after a debt crisis in September hit infrastructure funding company. This crisis badly affected the NBFC sector and triggered panic amongst investors and a cash crunch. Due to this massive volatility in the financial markets RBI and the government have taken initiatives to cater to the crisis in the financial market.

This will help in providing financial support to the sector. In addition to this liquidity will also be provided to banks & credit enhancement for refinancing needs.

At the time of crisis, the non-banking financial sector faced a liquidity shortage of over Rs 1 lakh crore. Due to this the government had to take a step therefore in order to provide credit to the NBFC sector government directed the RBI to open a special liquidity window. However, RBI refused to pay attention to the request of the government, therefore, the government looked after Section 7 under the RBI Act for a special liquidity window.

RBI has taken this initiative to encourage Non-Banking Finance Companies (NBFCs) to securitize their eligible assets; the minimum holding period (MHP) requirement has been cut by the Reserve Bank of India for NBFCs raising funds through securitization of loans of maturity period above 5 years.

A minimum number of installments has been reduced to 6 monthly installments which were 12 earlier or 2 quarterly installments which were 4 earlier subject to Minimum Retention Requirement (MRR) for this will be 20% of the book value of loans being securitized /20% of the cash flows from the assets assigned.

Read our article:Analysis of NBFC Liquidity Crunch in NBFC Sector

What will be the benefit of this notification to NBFCs?

With this notification, RBI made it easier for NBFCs to sell their loans. This step has been taken by the RBI in order to improve the liquidity for non-banking finance company (NBFCs). On the receipt of 6 monthly installments or 2 quarterly installments, finance companies can sell their long-term loans subject to the minimum retention requirement of 20% of the book value of the loans being securitized. Special dispensation will be applicable on securitization transactions carried out during the period of 6 months from the date of issuance of notification.

Nuts & Bolts of Relaxation in the Securitization Transaction for NBFCs

The introduction of this amendment is to relax the minimum holding period requirements for NBFCs subject to conditions. Let’s discuss the main points of the notification:

• Relaxation in the Minimum Holding Period (MHP)
  

After showing recovery of repayments of six monthly installments or two quarterly installments, NBFCs will be allowed to securitize loans with a maturity period of more than 5 years. Prior to this notification minimum holding period requirement was the repayment of at least twelve monthly installments or four quarterly installments.

• Change in MRR requirements for the loans securitized
  

In case NBFC retains at least 20% of the assets securitized/ assigned, only then the above-mentioned benefit will be available. On the basis of the tenure of the loan, MRR requirement ranges between 5%-10%.

• Timeline for availing this benefit
  

The timeline is six months from the date of issuance of the notification as it has been done by RBI to easing out the tension relating to liquidity issues in the NBFC sector.

The Minimum Holding Period (MHP) requirements and the Minimum Retention Requirement (MRR) requirements on the securitization of loans are the followings –

Details	Loans assigned during the period (29th November 2018 – 28th May 2019)	Loans assigned after 29th May 2019
Minimum Holding Period (MHP) requirements (Original maturity period less than 5 years)	Loans for maturity period up to 2 years – 3 months   Loans for maturity period between 2 to 5 years – 6 months	Loans for maturity period up to 2 years – 3 months   Loans for maturity period between 2 to 5 years – 6 months
Minimum Holding Period (MHP) requirements (Original maturity period of more than 5 years)	In case MRR requirement fulfilled – 6 months   In case MRR requirement not fulfilled – 12 months	Loans for maturity period up to 2 years – 3 months   Loans for maturity period between 2 to 5 years – 6 months
Minimum Retention Requirement (MRR) for loans (Original maturity period less than 5 years)	Loans for maturity period up to 2 years – 5%   Loans for maturity period more than 2 years – 10%	Loans for maturity period up to 2 years – 5%   Loans for maturity period more than 2 years – 10%
Minimum Retention Requirement (MRR) for loans (Original maturity period of more than 5 years)	In case the benefit of the Minimum Holding Period (MHP)  availed – 20%In case benefit of Minimum Holding Period (MHP)  not availed – 10%	Loans for maturity period up to 2 years – 5%   Loans for maturity period more than 2 years – 10%

Effect

Securitization purchase/loan buying has been increased by the public sector banks such as State Bank of India and Union Bank of India. With this, the NBFC sector is getting help greatly. From Rs 150 billion SBI has increased its securitization purchase to Rs 450 billion.

Such relaxing norms would definitely benefit home loans and loans against property. As such types of loans have low delinquency. NBFCs can tap for new funds from banks as the central bank is allowing NBFCs to quickly securitize their holdings.

Once the Reserve Bank of India took further steps to ease liquidity strains for NBFCs, shares of NBFCs and HFCs gained thereafter. As per the notification minimum holding period requirement for Non-Banking Finance Company is set to 6 months or 2 quarterly installments which were earlier 12 months. The rules are applicable to loans having a maturity period of more than 5 years. This initiative of the government is actually going to help housing finance companies (HFCs) having long-term maturity loans.

Takeaway

The Reserve Bank of India (RBI)^[1] has made liquidity norms easy for Non-Banking Financial Companies (NBFCs). These norms are making life better for NBFCs on the flip side it is making them more responsible as if they get funds quickly they would have to maintain a greater share of the assets in the books.

Now a large proportion of the loan book of NBFCs will be eligible for the purpose of securitization. Through the securitization route, more funds can be raised by the NBFCs. This will provide NBFCs additional liquidity. NBFC sector was facing liquidity crunch after IL&FS (Infrastructure Leasing & Financial Services Ltd.) made default which in turn government had to takeover entity. Due to defaults made by AAA-rated Infrastructure Leasing & Financial Services Ltd. credit markets of India got spoiled which led to a liquidity squeeze for NBFC.

Now in order to generate liquidity NBFCs are more dependent on bank credit lines and securitization to generate liquidity. As per the ICRA rating agency in the month of October, securitization volumes rose to Rs 18,000 crore and with this move of RBI this amount will increase.

Usually, loans having a maturity period of more than 5 years are home loans and LAP loans. Housing Finance Companies (HFCs) finance home loans. For which guidelines are issued by NHB in place of RBI. Rather than NBFCs, this relaxation will be more applicable to HFCs. Now the question is will NBFCs able to write LAP loans or will it allow them to use existing loans waiting for the 12 months to complete. While the MRR is 20% so we can say that this relaxation came up with giving and take.

Now there are two following alternatives for NBFCs either wait for 12 months to complete or enter into a transaction with 10% MRR or NBFCs can also avail the relaxation put in balance funding of 20%. Therefore this relaxation of RBI will seem appealing to those who are desperate for refinancing. As we all are aware that NBFCs had immediate liquidity concerns and banks were willing to take exposure to pools, therefore, it’s a good time to consider covered bonds. It will provide double layers of protection.