New securitisation rules: HDFC, HDFC Bk sorting out issues

The new securitisation rules had made the sale of home loans from HDFC to HDFC Bank difficult. Under the new rules, HDFC cannot give a credit enhancement to the loans which HDFC sells to the bank. However, HDFC says they are working out a way at no loss to either entity. CNBC-TV18’s Gopika Gopakumar spoke to the HDFC chief Keki Mistry.

There has been some confusion regarding the HDFC-HDFC Bank transaction under the new securitisation guidelines. Now, there are two ways in which HDFC can do this securitisation deal. One is through the pass through certificate whereby HDFC creates an SPV and thereby sells the loans to HDFC Bank. Now, this route will run into a lot of taxation issues. Therefore, HDFC doesn’t want to adopt this route. The other route is the loan assignment route. Under the existing guidelines, HDFC has been selling home loans to HDFC Bank through a bilateral transaction. They can continue doing this, but the only difference under the new guidelines is that HDFC will not be able to give a guarantee or a credit enhancement for the loans that are sold to HDFC Bank. Now, this means that the credit risk or any risk of a default by a borrower will now be transferred from HDFC to HDFC Bank. Earlier, HDFC has been getting a fee of 1.25%, a spread, from HDFC Bank for doing this. But under the new guidelines, HDFC will be charging a rate lower than 1.25%. Keki Mistry, vice chairman and chief executive officer of HDFC says, "When we sell a loan to HDFC Bank, we collect the interest and the principle from the customer on behalf of the bank. Under the current arrangement, we retain one-and-a-quarter percent, which includes the amount that we have to provide as credit enhancement. Now, if we are not providing that credit enhancement, we have to see that the difference should be one-and-a-quarter or lower. That is what we have to look at. But we will keep in mind the fact that historically our loan losses are low. Therefore, even though credit enhancement may or may not be provided, in reality, it is not going to make too much of a difference, as far as the asset quality is concerned." Under the new transaction, HDFC will be earning lower income than before. But the benefit is that they will be able to release the capital, which they were earlier keeping against the credit enhancement. Keki Mistry also went on to say that they will be working out a deal in the next three-four weeks to sort out the issue with HDFC Bank and arrive at a rate for the transaction to happen.