By Vibhor Mittal
RBI, through a notification on November 29, may have paved the way for NBFCs and housing finance companies (HFCs) to overcome concerns on how to meet increased demand for credit by borrowers and, at the same time, improve upon their liquidity position. Through its latest circular, the central bank has relaxed the Minimum Holding Period (MHP)—the period for which the asset needs to reside on the books of the seller before it becomes eligible for securitisation—by half, from 12 months to six months. This will be applicable to loans with an original maturity of more than five years, i.e., primarily mortgage loans. These loans now become eligible for securitisation once the underlying borrower has been billed six monthly installments, post full disbursement of the loan amount. RBI has however tried to ensure that NBFCs retain enough ‘skin in the game’ and, towards this end (a sensible measure from risk perspective), the minimum retention requirement (MRR)—the originator’s or NBFCs’ share in the asset pool being securitised—has been enhanced from 10% to 20%. The dispensation provided by RBI on MHP will stay in force for a period of six months.
So, how would this actually benefit the NBFCs and HFCs?
With MHP criteria being relaxed, a higher proportion of HFCs and NBFCs loan book would now become eligible for securitisation. This is a step in the right direction and will allow these entities to raise more funds through the securitisation route, enabling additional liquidity. The doubling of NBFCs’ retained share in the asset pool to 20% will further ensure that they securitise loans without much dilution in the credit quality of the pool.
The benefit would be higher for NBFCs that are very active in the securitisation market, since they have fewer loans on their books that are eligible for securitisation. Similarly, entities that have a limited track record in the business and have a large portion of the book that is not seasoned will also stand to gain. However, apart from these two categories, other NBFCs may not benefit much, as they were in any case, not facing dearth of eligible assets as a constraining factor for looking at securitisation transactions. Post the temporary easing of MHP norms, the share of mortgage loans (Housing loans and Loan against property) in the securitisation market is likely to increase further. At present, mortgage loans already account for more than 50% of the overall securitisation market volumes. This is depicted from the table below.
Under the revised RBI norms, it is estimated that retail housing loan portfolio amounting to around `75,000 crore and retail non-housing loan portfolio amounting to around `40,000 crore, for both NBFCs and HFCs, would now incrementally qualify for securitisation. It however remains to be seen how much of it actually gets securitised. Also, additional funds raised by NBFCs through portfolio sell-downs would depend on the buyers’ appetite and also the NBFCs’ ability to raise funds directly on their books through other alternative avenues available to them.
The author is Head (Structured Finance), ICRA Ltd