Housing finance cos to benefit most from RBI’s easing of portfolio sell-down norms

Neha DaveMoneycontrol Research

NBFCs were caught completely off-guard on the shrinking or, in some cases, complete withdrawal of liquidity triggered by defaults of IL&FS' group companies after September end. While there has been some change in market sentiment with gradual easing in liquidity situation in November, the funding situation for NBFCs continues to remain challenging. Hence, in a bid to ease liquidity and support growth, the Reserve Bank of India (RBI) relaxed rules for non-banking financial companies (NBFCs) to sell or securitise their loan books last week.

Current liquidity scenario

Series of measures announced so far by regulators such as the RBI and the National Housing Bank has improved access to funds to NBFCs. However, liquidity is still tight considering a large amount of debt papers of NBFCs coming up for redemption between November and March.

For instance, as per ICRA, overall housing finance companies (HFCs) had around Rs 1 lakh crore of commercial paper (CP) exposure outstanding as on September 30, 2018, close to 95 percent of which matures by December end and would need to be refinanced or rolled over. Given mutual funds are being selective in taking incremental exposures, many HFCs will have to depend on other sources of funding.

Consequently, NBFCs and HFCs are seen tapping banks for funds and reducing credit to select segments to shore up liquidity for impending redemptions. However, some NBFCs have found it tough to quickly drawdown on bank lines.

Alternative funding sources gaining prominence

Against this backdrop, alternate funding avenues are fast gaining traction. One such avenue of funding is retail bonds. Many large NBFCs announced retail bond issuances in October and November after having raised around Rs 27,000 crore through retail bonds between April and September this fiscal, compared with Rs 5,000 crore in the whole of FY18. Securitisation is another significant alternative to generate liquidity.

 Modification of securitisation guidelines

RBI’s recent notification to modify the securitisation guidelines includes two key amendments:

1. Relaxation in the holding period requirement

The regulator relaxed the minimum holding period (MHP) for the loans originated by NBFCs to six months against an earlier requirement of 12 months, subject to certain conditions. This means NBFCs will now be allowed to securitise/ assign loans after showing six months records of repayments. However, the revised rule is applicable only for loans with an original maturity of over 5 years. 

2. Change in the retention requirement

The benefit of a reduced holding period will be available only if the NBFC retains at least 20 percent of the assets securitised/ assigned. Currently, the minimum retention requirement (MRR) ranges between 5-10 percent depending on the tenure of the loans. This has been done to ensure that NBFCs selling loan portfolios have adequate skin in the game even after securitisation. This means NBFCs have 2 options – either wait for 12 months to be over to do a securitisation deal with 5-10 percent MRR or avail RBI’s relaxation and put in on-balance funding of 20 percent. Given this situation, RBI’s relaxation will appeal only to those NBFCs that are desperate for raising funds immediately.

HFCs to benefit the most

RBI’s announcement is a welcome move and will immensely help the non-bank sector grappling with the liquidity issues. This relaxation would primarily benefit HFCs where the loan tenure is typically more than 5 years with greater proportion HFCs’ loan book now becoming eligible for securitisation.

Securitisation volume set to increase further

With the reduction in conventional funding sources, NBFCs are increasingly relying on portfolio sell-down to banks. Banks too are preferring buying portfolios/assets as against direct lending to NBFCs. There are 2 clear reasons for banks to prefer securitisation transactions. First, through securitisation, banks are not exposed to entity-level credit risk of NBFCs as their exposure is limited to the underlying pool of borrowers to whom NBFCs have lent. Second, the banks that have exhausted single party credit limit to an entity can still take NBFC exposure by buying its loan portfolios.

Securitisation volume increased by 95 percent YoY to Rs 67,700 crore in H1 FY19 as per Crisil estimates. October too witnessed heightened activity in the securitisation market.

Securitisation consists of two types of transactions – 1) rated Pass-through Certificate (PTC) transactions and 2) unrated direct assignment (DA) of a pool of loans from one entity to another. Between the two types, DA is the most popular route used by NBFCs as they can upfront book the income under IND-AS for the loans sold through DA. Within DA, mortgage-backed loans remain the most preferred asset class, accounting for 74 percent of DA volume and 46 percent of securitisation volume in H1 FY19 as per Crisil.

RBI’s relaxation is aimed to ease out the liquidity issues faced by the NBFCs and help them tide through the high redemptions/maturity period of the next 2-3 months.  Hence, the relaxation is temporary and only for a period of six months from the date of issuance of notification.

We expect NBFCs especially HFCs to take advantage of the relaxations and continue to resort to bilateral DA transactions to raise liquidity in coming months in which both public and private sector banks are likely to participate in a big way. Consequently, we see many small HFCs ceding their market share in favour of banks.

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