The Reserve Bank of India (RBI) headquarters stands in Mumbai (Photographer: Adeel Halim/Bloomberg)

NBFCs, Housing Finance Firms Gain On Relaxation In Securitisation Rules

Shares of non bank lenders and housing finance companies gained after the Reserve Bank of India took further steps to ease liquidity strains for these firms.

In a notification on Thursday, the Reserve Bank of India said that the minimum holding period requirement for non-banking finance company originating loans, will now be set at six monthly or two quarterly installments. Earlier the holding period was 12 months.

The revised rules are applicable for loans of original maturity of above 5 years. This will help housing finance companies in particular who have longer maturity loans.

NBFCs, Housing Finance Firms Gain On Relaxation In Securitisation Rules

However, the RBI has increased the holding amount from 10 percent to 20 percent of the loan portfolio. This has been done to ensure that NBFCs selling loan portfolios have adequate skin in the game even after securitisation.

Minimum Retention Requirement for such securitisation/assignment transactions shall be 20 percent of the book value of the loans being securitised/20 percent of the cash flows from the assets assigned.
RBI Circular

The relaxation will stay in place for a six-month period from the date of the circular, said the RBI.

Relaxation in the Minimum Holding Period criteria would primarily benefit HFCs and NBFCs offering mortgage loans where the loan tenure is typically more than 5 years. A greater proportion of their loan book would now become eligible for securitisation. Accordingly, these entities can raise more funds through the securitisation route, which will provide them with additional liquidity.
Vibhor Mittal, Group Head - Structured Finance, ICRA

A default by once AAA-rated Infrastructure Leasing & Financial Services Ltd. roiled the credit markets in India and led to a liquidity squeeze for NBFCs. While the market has improved over the month of November, non bank lenders are now more dependent on bank credit lines and securitisation to generate liquidity.

Securitisation volumes rose to Rs 18,000 crore in October, said rating agency ICRA in a release on Nov. 13. These funds helped NBFCs meet a portion of the Rs 78,000 crore in commercial paper that was due for repayment in October.

So far this year, Rs 83,800 crore in securitisation deals have been reported. Volumes could pick up further with the RBI’s move.

In terms of liquidity support, theoretically, an additional ~Rs 1.0-1.5 lakh crore of loans could be eligible to be securitised...So this looks like a reasonable support to the NBFCs. However, we agree that not entire pool will be securitised.
Suresh Mahadevan, Analyst, Macquarie Capital Securities

The easier securitisation rules add to other measures announced by the RBI.

On November 2, the regulator allowed for partial credit enhancement of NBFC bonds. This could, theoretically, help smaller NBFCs improve their credit rating and raise more funds. The decision will boost confidence of mutual funds and debt investors in NBFCs although a large volume of such credit enhancements is unlikely, said Kotak Institutional Equities in a note on Nov. 5.

Other steps taken by the RBI include a loosening of the single party exposure limit for NBFCs to 15 percent from 10 percent earlier. This will ensure that banks still have some room to buy loan portfolios from NBFCs.

Watch Repco Home Finance’s R Varadharajan interview post the liquidity relief by RBI.