Securitisation activity is resuming, five months after the Reserve Bank of India issued stringent guidelines that required financial institutions to hold loans for a minimum period before selling them away.
Financial institutions – mostly non-banking financial corporations (NBFCs) or microfinance institutions in India – that originate loans turn their loans into marketable securities through a process known as securitisation, under which a special purpose vehicle is created to issue these securities that are then sold to buyers.
“Since it requires originators to keep the assets for a minimum defined period, there was a pause in securitisation activity after the guidelines, during which period the originators accumulated assets. Activity levels have gradually resumed,” said Pawan Agrawal, senior director at Crisil Ratings.
Minimum holding period is now six months for NBFCs and three months for microfinance bodies. “The motivator is not the economics of securitisation but priority sector lending. Securitisation will go up this quarter because banks are still hungry for private sector portfolio,” said Vinod Kothari, author of ‘Securitisation: The Financial Instrument of the Future’.
However, the deal sizes are expected to go down with now only banks being interested in buying these tradable securities from NBFCs and microfinance companies to fulfill their priority sector lending target of 40% of overall lending. New RBI guidelines have deterred mutual funds, which were once very active in the market, because of uncertainty of the taxation on these instruments.
The proportion of microfinance institutions transactions in total number of securitisation transactions has increased to 40% in the current fiscal (till end-October 2012), from about 33% in fiscal 2012, according to the Crisil data.
“Deal sizes will go down because there is more priority sector lending focus now. Deals sizes are always smaller is priority sector and larger in non-priority sector. There was very little securitisation of non-priority sector lending in first six months,” said Srei Equipment Finance’s CEO D K Vyas.
Foreign banks are expected to participate more in buying loans from NBFCs and microfinance institutions to comply with the priority sector requirements.