Will RBI's securitisation norms cripple banks & NBFCs?

RBI's latest guidelines on securitisation are going to hit both banks and NBFCs. They will immediately erode NBFC capital, and mean more mark-to market pressure for banks. CNBC-TV18's Gopika Gopakumar reports.

For banks and NBFCs, the process of securitization, that's pooling loans and selling them to investors for cash, just got tougher. Traditionally, financial institutions have two methods of securitization: One: By transferring pool of loans to a special purpose vehicle which will in turn issue pass through certificates to investors. Or Two: Directly sell their loans to other financial institutions.
With RBI's new rules, this second option of bilateral sales will lose its sheen because selling banks and NBFCs can no longer offer credit enhancements.
These credit enhancements were essentially guarantees that protect the investor if a borrower defaults.
Experts say this rule will shrink the direct assignment transactions, which currently form 75% of the market. NBFCs, who are the major loan sellers, will take the worst hit.
Financial analyst Nischint Chawathe of Kotak Institutional Equities says earlier banks were primarily selling down loans under the bilateral route.
"They were not using the securitization route. That will essentially mean that there would be some pressure on the capital adequacy front. This is because the capital requirements for the subordinated tranche, in case of securitization is much harsher," he says. 
But one of the biggest players in the securitisation market -- Shriram Transport -- says it does not see a big impact on volumes.
However, it expects a 2.5-3% fall in tier-1 capital, from the current 18%.
As we replace old transactions immediate will be 2%, says Umesh Revankar, MD, Shriram Transport Finance adding, "don't think will be more than 2.5-3% in future."
"For NBFC, we have advantage in origination and selling. Since our asset is priority sector asset, more than 90% is priority sector asset there is huge demand for our asset because most of the private banks and MNC banks who do not have reach they have been looking at buying from our company for filling priority sector. Demand is huge, will be able to supply. Don't think total securitization will come down," he told CNBC-TV18.
The new rules also say that only loans that are repayable in installments can be securitised.
So since gold loans are normally repaid in one shot, companies offering gold loans will no longer be able to securitise these loans. Analysts say banks could also be hit, as they invest in these securitised papers to meet priority sector norms.
Also, the pass through certificate method will mean lower loan growth for banks, as these certificates will be classified as investments and not advances. This would results in mark-to-market impact.
That's not all. The RBI is yet to take a final call on the Nair Committee recommendations on priority sector rules. These rules limit bank exposure to NBFCs at 5% and if implemented, will make it difficult for banks to invest in securitised papers, and will in turn lead to funds drying up for NBFCs.