Non-banking financial companies (NBFCs) ramped up their presence in the structured finance market in 2009-10, while banks, cramped by Reserve Bank of India guidelines, fell behind.
An improvement in the credit environment over the year made it easier for NBFCs to increase the volume of securitised loans. Banks, on the other hand, expect to see a further reduction in their share in the structured finance market, with RBI proposing to tighten securitisation norms. According to estimates by rating agency Icra, the largest presence in the securitisation market in 2009-10 was commercial vehicle lender Shriram Transport Finance. It securitised loans worth Rs 8,750 crore in 2009-10. Sprecialising in loans for used commercial vehicles, it had securitised loans worth Rs 3,000 crore in 2008-09.
“There was always a demand for us to securitise loans but we did not want to do too much, because the credit enhancements were very high, due to the economic downturn. Now that the rating agency’s credit perceptions, the credit enhancements, have come down, we were able to securitise loans at an attractive and competitive price,” said R Shridhar, Managing Director, Shriram Transport Finance.
| DEAL TIME | |||
| RETAIL AND HOME LOANS | CORPORATE LOANS | ||
| NBFC | Amount (Rs cr) | Bank | Approximate amount (Rs cr) |
| Shriram Transport Finance * | About 9,000 | ICICI Bank | 8,000 |
| HDFC | Around 6,100 | Axis Bank | 2,000 |
| Tata Motor Finance | Over 3,000 | Kotak Mahindra and Primus | 1,600 |
| Top players in securitisation/sell-off in 2009-10 Source : estimates by rating agency ICRA | |||
Securitisation involves the creation of asset-backed bonds, which are are debt instruments created from a pool of loan assets. The interest payments on the original loans form the cash flows used to pay investors in the bonds. For corporate loans, which are much larger in value, the issuer can securitise a single loan instead of creating a pool of assets in a transaction known as a loan sell-off (LSO).
To improve the credit rating of an instrument, issuers often offer a credit enhancement, which is often in the form of a guarantee to absorb a specified percentage of losses on the portfolio.
According to Shriram Transport’s Shridhar, issuers had to offer credit enhancement of as high as 20 per cent of the pool during the economic downturn. With the improvement in the economy and the credit quality of borrowers, the figure is now down to single digits.
Other NBFCs active in the securitisation market are Tata Motor Finance and Reliance Capital, apart from HDFC, which sells a part of its loan portfolio to HDFC Bank to help meet its priority sector lending requirements.
NBFC advantage
Icra says NBFCs have become the dominant issuers of securitised paper in the Indian market in recent years. “One, the Reserve Bank of India restrictions on securitisation are more applicable to banks than NBFCs. In addition, some of the banks which were big drivers of volumes in the securitisation market have seen a fall in loan originations over the last few quarters,” said Naresh Thakkar, managing director, Icra.
“Most banks have also raised capital and are now well-capitalised, so they do not have to free-up capital by selling down loans,” Thakkar added.
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 LSOs by banks in 2009-10, according to Icra.
“NBFCs have taken a view that the RBI recommendations do not apply to them and are thus growing their market share, while the share of banks is shrinking,” said a foreign bank executive.
More concerns
RBI has now come out with draft guidelines which stipulate a minimum holding period of nine months for loans which have an original maturity of 24 months and are to be periodically repaid. Loans with an original maturity of more than 24 months will have to be held on the issuer’s books for at least 12 months.
While the market for corporate loans’ securitisation has already slowed, bankers fear the new guidelines will further pull down retail loan securitisation as well. “The key clarification being sought is the distinction between retail and corporate loans in the new guidelines,” said Nishikant Das, Director of Debt Capital Markets at Standard Chartered Bank.
According to bankers, RBI’s main concern about corporate loan securitisation is that monitoring asset quality and end-use of loans become a problem once a bank sells off the loan to another investor. However, the minimum holding period guidelines would also affect the retail asset securitisation market.
