Fintech Security

Impact of new securitization guidelines by RBI on the business ecosystem

The Indian Securitization industry is approx. 2 lakh crore. In the Financial Year (FY) 2021-22 securitization market contributed to a volume of 1.35 lakh crore to the Indian economy. The securitization market consists of various asset classes like Commercial Vehicles (CV), Micro Finance loans (MFI), Loan Against Property (LAP), Construction Equipment (CE) & Home Loan (HL). For the FY: 21-22, various asset classes were: commercial vehicle (CV; 25%), gold (10%) and two-wheeler (2%), microfinance loans (10%), mortgage HL & LAP (53%).

In India, the securitization market motive is driven by the “Priority sector targets for Banks (Public & Private) to comply with the RBI norms. The Public banks are keener on the purchase of pool buyouts which constitute 65% of the total securitized exposure and the Pass-Through Certificate market is driven by private Banks, NBFCs, and Multinational Corporations (MNC) banks, which are 35% of the total exposure. The market has also seen a new asset class of unsecured loans such as consumer, personal, and business loans approx. (14% of the total issuances) along with traditional asset classes as mentioned above.

On the 5 th of December-22, the Reserve Bank of India (RBI) updated its guidelines of the “Master Direction on Securitization of Standard Assets Directions, 2021”. This master direction is applied to all scheduled commercial banks which include Small Finance Banks, excluding Regional Rural Banks, including all-India Term Financial Institutions like NABARD, NHB, EXIM, and SIDBI, along with all Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs).

RBI’s revised guidelines issued 3 major amendments which will primarily impact the securitization route via Pass through certificates and not Bilateral Assignments.

1. Loans with residual maturity of fewer than 365 days –

Explanation: The guidelines stated that loans with a residual maturity of less than a year i.e. 365 days cannot be securitized.

Impact: Microfinance loans, short-term loans like Gold loans, unsecured consumer loans, personal loans, and Fintech loans have a door-to-door maturity of 18 to 24 months, after achieving existing seasoning requirements it will be challenging to achieve the residual maturity of more than 365 days for the such asset class. The demand for these asset classes is quite high as Banks, Financial Institutions, and NBFCs invest in said loans via the securitization route. With the application of revised changes, there will be much more restrictions in the supply of loans available for securitization, primarily impacting the origination for the above asset class. As short-tenure loans will not be eligible for securitization it will increase the credit enhancement requirements.

In FY 21-22 & 22-23, we have seen a lot of interest generated for short-term loans like Gold loans, unsecured consumer loans, and personal loans originated by Fintech companies.

However, with this amendment falling in place such pools tapping the securitization market will be less viable. On the brighter side, the non-priority sector lending might see traction in demand as those pools in the past have seen less demand than the availability of the supply, and we might see a shift towards the particular segment. The Pool Buyout route will be more preferred by the investors.

2. Minimum Holding Period for commercial or residential real estate mortgages –

Explanation: The MHP for commercial or residential real estate mortgages shall be counted from the date of full disbursement of the loan, or registration of security interest with the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI), whichever is later.

Impact: Investors are always keen on only taking fully disbursed loans so there will not be much impact as it has now been clarified under the latest guidelines. Also point to be noted is that in this asset class most of the transactions happen through the Pool buyouts route and not via the securitization route.

3. The minimum ticket size for issuance of securitization notes shall be Rs.1 crore 

Explanation: The minimum ticket size-the size of investment by a single investor for the issuance and listing of securitization should be 1 crore.

Impact: With these criteria, there may be restrictions for retail investors to participate at the primary subscription level. However, retail investors might have to participate in securitized debt instruments via the secondary market.

Bottom Line:

After the Covid-19 era, we have seen an increase in securitization transactions. Now, with the revised guidelines short-term asset classes might get impacted for some time, also the reach of the retail investors needs to be relooked at the primary issuance. However, the positive side for the investor is that there will be better quality loans that will be securitized. As these loans constitute a small amount of about 5% of the total securitization volume. However other players i.e. MFI, Fintech, and Gold loan companies involved in this market will be getting impacted.



Views expressed above are the author’s own.


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