FREE

MOSL: FINANCIALS – NBFC-Regulatory dispensation on securitization transactions

Financials - NBFC: Regulatory dispensation on securitization transactions; Yet another funding option for NBFCs especially HFCs

 

• In a press release today, the RBI decided to relax the Minimum Holding Period (MHP) requirement for originating NBFCs, in respect of loans of original maturity above 5 years, to receipt of repayment of six monthly instalments or two quarterly instalments. This has been reduced from the earlier tenure of 12 months or four quarterly instalments. These guidelines would be applicable to HFCs as well.
• However, the Minimum Retention Ratio (MRR) for such transactions has been increased from 10% of the book value of the loans being securitized/10% of the cash flows from the assets assigned to 20% of the book value of the loans being securitized/20% of the cash flows from the assets assigned.
• The above dispensation is applicable to securitization/assignment transactions carried out during a period of six months from the date of issuance of the circular.
• In our opinion, this should be beneficial largely to HFCs only, because they have loans of 5-year+ maturity. We believe DEWH and IHFL will be the big beneficiaries among HFCs, since they have a higher share of off-BS assets compared to peers and their reliance on sell-downs as a means of fund raising has been greater in these times of tight liquidity.
• Our analysis suggests that the incremental pool of assets eligible for securitization/assignment transaction is ~INR1.6t (based on our calculation as described later). However, many HFCs such as LICHF, GRUH, CanFin and Repco do not sell down assets. Hence, incremental pool of assets eligible for securitization/assignment for those HFCs that sell down assets is ~INR1.3t. Within an MRR of 20%, this would lead to potential funding possibility of INR1t via sell-downs.