The Reserve Bank of India (RBI) has proposed to tighten securitisation norms for non-bank financial companies (NBFCs), which will bring these on a par with those for banks.
Under the draft norms, released on Thursday, for loans up to 24 months maturity with a periodic repayment schedule, NBFCs will have to hold these on their books for a minimum of nine months. For bullet repayments (lump sum payment of the principal at maturity only), the minimum holding period is 12 months. RBI has invited comments on these proposals.
For loans above 24 months maturity with a periodic repayment schedule, NBFCs will have to hold these loans on their books for a minimum of 12 months. No securitisation of loans with maturity exceeding 24 months and bullet repayment is envisaged.
The move aims to bring securitisation norms for NBFCs in line with those for banks and is likely to impact companies such as Shriram Transport Finance and Tata Motors Finance.
The norms also specify minimum retention requirements. For loans with original maturity of 24 months or less, NBFCs will have to retain five per cent of the book value of the loans being securitised. For loans with original maturity above 24 months, NBFCs will have to retain 10 per cent of the book value of the loans being securitised.
At present, total investment by the originator in securities issued by Special Purpose
Vehicles through underwriting or otherwise is limited to 10 per cent of the total Pass Through Certificates issued. “However, to ensure transfer of a significant credit risk associated with the securitised exposures to the third parties for recognition of risk transfer, it is advised that the total exposure of NBFCs to the SPV and/or securitised assets in the following forms should not exceed 20 per cent,” RBI said in a circular.
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The norms also prohibit NBFCs from hedging the credit risk in the retained exposures counting towards the minimum retention requirements.
In October last year, RBI recommended that banks hold loans on their books for a year at least before securitising these and retain at least 10 per cent of the pool of securitised assets. The regulator said it wanted to ensure that originators did not compromise on due diligence while issuing loans they did not intend to hold on their books. This requirement was one of the factors responsible for a 60 per cent fall in loan sell-offs by banks in 2009-10, according to ratings agency Icra.
“NBFCs had earlier taken a view that the RBI recommendations do not apply to them and thus grew their market share, while the share of banks shrank,” said a foreign bank executive.