RBI aims to upgrade due diligence by banks, NBFCs; analysts say hit on retail loans might ensue.
Banks and non-banking finance companies (NBFCs) might soon find the common practice of buying and selling loans from each other curtailed.
The Reserve Bank of India (RBI) has already proposed to tighten guidelines on loan securitisation and is now working on norms for direct loan sales.
| DEBT MARKET | |
| RETAIL AND HOME LOANS | |
| NBFC | Amount (Rs cr) |
| Shriram Transport Finance * | About 9,000 |
| HDFC | Around 6,100 |
| Tata Motor Finance | Over 3,000 |
| CORPORATE LOANS | |
| Bank | Approximate amount (Rs cr) |
| ICICI Bank | 8,000 |
| Axis Bank | 2,000 |
| Kotak Mahindra and Primus | 1,600 |
| Source : estimates by rating agency ICRA * from company | |
Any tightening of loan sales norms will limit lenders’ ability to churn their portfolios by selling loans and re-deploying funds and capital towards fresh assets. Banks might also find it more difficult to buy loan portfolios of NBFCs to meet year-end priority sector lending requirements.
Last week, RBI issued draft guidelines on loan securitisation by NBFCs. These stipulate that lenders must hold assets for a minimum period before selling these and must retain a portion of the securitised portfolio on their books.
The banking regulator had issued identical draft guidelines for banks in April.
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Due diligence checks
The purpose of the guidelines is to ensure banks do not compromise on due diligence standards while originating loans they plan to sell down, RBI said.
Securitisation involves the pooling of loans into a special purpose vehicle, which issues pass-through certificates against these assets, that are purchased by investors. Future cash flows from the assets are passed on to the investors as interest on the securities.
In the case of loan sales, known as direct assignments, the assets are directly transferred form one lender to another without the use of a SPV. Insurers and mutual funds can invest in securitised assets, whereas in the case of direct assignments, the buyer must be a lending entity.
Speaking to Business Standard, bankers said they expect the guidelines on direct assignment to be similar to those for securitisation. They were unwilling to be identified ,since these guidelines have not been made public yet.
The tightened norms will likely crimp the Indian structured finance market, which shrank 22 per cent to Rs 42,600 crore in the financial year up to March 31, according to ratings agency Icra.
As a result of the securitisation guidelines, the value of single corporate loan securitisations fell by 60 per cent in 2009-10.
Securitisation of retail assets, mostly by NBFCs, who till now had assumed they were not covered by the guidelines, grew by 61 per cent over the same period.
However, any fresh guidelines on direct assignments would have a large impact on retail loans. According to Icra, almost 90 per cent of the retail loan transactions involved bilateral assignment of pools, largely by NBFCs to banks.
“Securitisation assets sit on an investment balance sheet, while assets procured through a purchase sit on a lending balance sheet. There is a case for leniency for banks buying the portfolio of NBFCs,” said the chief financial officer of a private sector bank.
Retail loan impact
While the market for corporate loans’ securitisation has already slowed, bankers fear the new guidelines will further pull down retail loan transactions as well. “The key clarification being sought is the distinction between retail and corporate loans in the new guidelines,” said a senior executive at Standard Chartered Bank.
Bankers said any tightening in direct loan sales norms would also impede banks’ practice of buying loans originated by NBFCs to meet year-end priority sector lending requirements.
According to RBI rules, domestic banks have to ensure a minimum 40 per cent of their total advances are made to segments classified as ‘priority sector’. For foreign banks, the priority sector lending requirement is 32 per cent.