Banks and non-banking financial companies (NBFCs) may find it difficult to extend the Reserve Bank of India's moratorium on securitised loans under the current form of agreements, according to a report by CARE Ratings.
Last month, the RBI announced a relief package that included a three-month moratorium on payments of all term loans outstanding as on March 1.
According to the report, in existing securitisation transactions, the loans are not considered to be the assets of the originator/ servicer which may be NBFCs or banks.
"Hence, the servicing NBFCs/ MFIs / banks would not be able to extend the moratorium to the underlying loans in these securitisation transactions unless they have obtained consent from the investors," the rating agency said in a report.
If the originators or servicers extend the moratorium to the borrowers of the underlying loans in these securitisation transactions without the prior approval of the investors, then it would be considered as a breach of contract, the report said.
Even the existing documentation for these transactions does not envisage any such scenario of disruption in collections from underlying loans.
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"An addendum to the existing documentation would be required to address the moratorium period and the extension of the final legal maturity of the transaction, with the consent of the investor," the rating agency said.
The ongoing lockdown has severely affected the earning capacity of daily wage earners, small traders and shopkeepers.
As a consequence, the micro-loans and MSME loan portfolios of NBFCs and microfinance institutions (MFIs) are likely to experience significant drop in collections after the moratorium period as well, the report said.
It said that under the securitisation transactions, if investors do not agree to a moratorium on the payouts to be made to them, NBFCs will have to pay them even with reduced collections or complete absence of collections from the underlying pool.
"In such a case, the credit enhancement would be utilised to cover for the shortfalls. This could lead to downward rating actions depending on the quantum of available credit enhancement, utilisation of the same and consequent reduction in the cover for future payouts," the report said.
It said the primary challenge for the originator/ servicer would be the difficulty in differentiating between an asset that has been securitised as compared with any contract which is held on their books, especially at the branch level.
Also, the borrowers would be unaware that their contracts have been sold down and would want to take advantage of the moratorium irrespective of the contract sell down, the report said.
"In a scenario where the investor consent is not obtained for deferring the PTC payouts, the contracts in the pool that do not pay on time would have to be classified as defaulting contracts and reported as such to the credit bureaus, thus defeating the spirit of the moratorium announced by the RBI," the rating agency added.