On December 5, 2022, the Reserve Bank of India (RBI) announced revisions to the Master Direction - Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021. These guidelines were originally issued on September 24, 2021, superseding the earlier ones issued in 2012. These are applicable to all transactions involving securitisation of standard assets involving Scheduled Commercial Banks, All India Term Financial Institutions, Small Finance Banks, Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs).
There are three broad changes in the new guidelines. First, the revised guidelines disallow securitisation, through the pass-through certificate (PTC) route, of loans with residual maturity of less than 365 days. This would limit securitisation of relatively short-tenured asset classes. For instance, personal and consumer loans, which attributed to less than 5% of overall securitisation volumes in H1 FY2023, having witnessed significant traction in recent quarters, is expected to be impacted. Under the personal loans (PL) umbrella, the 'buy now, pay later' loans disbursed by fintech's / digital lenders are typically for a tenure of up to 12 months and hence will now be ineligible for securitisation. Gold loan lenders will also witness a significant depletion of eligible pool for issuing PTCs. The impact on micro loan asset class is expected to be limited. An analysis of the top originators in micro finance institutions (MFI) indicates a predominance (~70% - 80% share) of more than 18-months original tenure loans, implying ample availability of pools for securitisation, post MHP. Moreover, direct assignment (DA) forms a majority share in securitisation volumes of micro and gold loans, and thus the impact on overall securitisation is expected to be limited.
Ms. Samriddhi Chowdhary, Vice President, and Co-Group Head - Structured Finance Ratings at ICRA, said: "The residual maturity threshold of 365 days, coupled with the minimum holding period requirement would reduce the portfolio available for securitisation in short tenure asset classes. The change in eligibility criteria, will have a significant impact on new age digital lenders, limiting their participation in the securitisation market through the PTC route. Though the DA route is available, the perceived risk profile of the asset class and absence of credit enhancement in DAs has thus far restricted investor interest. Resource mobilisation in the MFI segment, a sector which is witnessing a rebound after facing considerable headwinds amidst the pandemic, is expected to remain largely unimpacted. Focus on 18 to 24 months original tenor loans ensures availability of securitisable assets along with a reasonable window to securitise. Overall, the impact of this change in Indian securitisation market will be minimal as personal and consumer loans form a lower share in the overall volumes."
The second key change in the guidelines, pertains to the minimum holding period (MHP) in mortgage loans. As per the revised guidelines. The MHP shall be counted from the date of full disbursement of the loan, or registration of security interest with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), whichever is later. Full disbursement of mortgage loans typically happens after the CERSAI registration and time lag can be higher in under construction projects, where disbursements are linked to construction progress. Thirdly, the guidelines specify that a minimum investment size of Rs. 1 crore should be considered for each investor as against an aggregate investment earlier.
Mr. Sachin Joglekar, Assistant Vice President, and Sector Head, ICRA, adds: "The change in MHP definition will lead to some reduction in eligible pools for mortgage loan originators. However, the credit quality of the pools is likely to improve as they will tend to have higher seasoning due to the time lag between the CERSAI registration and the full disbursement. Moreover, a large share of the mortgage loan securitisation is done through the DA route and hence the overall impact will be lower. An amendment on the minimum investment of Rs. 1 crore per investor is clarificatory in nature. The minimum investment requirement for each investor would help keep small/retail investors, who may not fully understand the complexities of securitisation, at bay. At the same time, the market would still be accessible to more financially savvy investors such as HNIs and family wealth offices." |
