Relaxed norms likely to hurt NBFCs in long run, banks stand to gain

Revised securitisation regulations may bring relief of Rs 1 trillion, but could impact ALM and asset quality

It was flashing green for mid- and small-cap non-banking financial company (NBFC) stocks on Friday. Dewan Housing, Indiabulls Housing Finance, Repco Home Finance, Gruh Finance, and Sundaram Finance gained 2-8 per cent on Friday, reacting to the regulatory relief pertaining to securitisation or sell-down of loans. The new norms came in after market hours on Thursday.

Given that Dewan Housing and Indiabulls Housing sell down about 10-17 per cent of their book, the Reserve Bank of India’s (RBI) move to reduce the minimum holding period to six months from the earlier 12 on loans with over five years’ maturity, will be of benefit to both. 

Motilal Oswal Financial Services estimates the move entails a relief of about Rs 1 trillion to the industry. However, on the flip side, the earlier threshold of 5-10 per cent minimum retention ratio has been hiked to 20 per cent, implying NBFCs may have to bear a larger portion of the losses. 

There are other challenges, too, considering the changing dynamics of the securitisation market. The visible one is greater dominance of banks in negotiating these deals. Krishnan Sethuraman of CRISIL says the bargaining power of banks could significantly increase in acquiring loans from NBFCs. “In an increasing interest rate scenario, coupled with liquidity crunch, banks will tend to cherry-pick loans,” he says. In that case, whether NBFCs will earn the historic margins on such loans is questionable. 

Experts say an increased sell-down scenario to bump up liquidity could hurt net interest margins in the near-term, while it could challenge asset-liability management (ALM) in the long run. “Loan securitisation is a key tool to meet short-tenure liabilities. If NBFCs lose out on spreads, which is quite possible considering how banks will cherry pick quality loans from NBFCs, they could land in a tight spot while retiring loans maturing in the short-term,” warns Pankaj Pandey, head of research, ICICI Securities. 

Finally, cherry-picking by banks could also cast doubts over the outstanding loan portfolios of NBFCs. Experts say NBFCs could become more vulnerable to asset quality pressures. On the whole, the NBFC sector may end up walking on a tighter rope.