RBI's final guidelines on securitisation: ICRA
ICRA Ratings has come out with its report on "RBI's final guidelines on securitisation and direct assignment transactions to adversely impact volumes in the near term."
ICRA Ratings has come out with its report on "RBI's final guidelines on securitisation and direct assignment transactions to adversely impact volumes in the near term."
The RBI, on 7 May 2012, has put out the final guidelines on securitisation and direct assignment of loan receivables. This is the first time the RBI has issued separate guidelines for Direct Assignment transactions. These guidelines are largely similar to the draft guidelines released in September 2011, other than some differences – the key ones pertain to Minimum Holding Period (MHP) requirement and credit enhancement reset.The biggest impact of the Guidelines is expected to be on Direct Assignment transactions that formed about 75% of the market in FY2012 (as per ICRA’s estimates)). Under the Guidelines, no credit enhancement is permitted for these transactions. Given the prohibition on credit enhancement, the investing banks will be exposed to the entire credit risk on the assigned portfolio, which most banks may not be comfortable with. Hence the volume of such assignment transactions is expected to be severely affected.One of the key objectives of the banks to acquire loan pools was to meet their Priority Sector Lending (PSL) targets, particularly post RBI’s Master Circular of July 2011 on Priority Sector Lending as per which loans by banks to NBFCs no longer qualify as PSL. Given that the need to meet PSL targets would continue to be there, banks could shift—at least partly—to the securitisation route to meet these targets. However, the deterrents to such a shift to securitisation are two-fold—high capital charge for Originators1 and impact of mark-to-market for the Investing Banks. Further, the unresolved issue of the Income Tax authorities’ claim of taxing the Special Purpose Vehicle (SPV) involved in securitisation transactions as a separate entity is another factor likely to constrain a wide-spread move towards securitisation.Guidelines negative for NBFCs
The likely dip in volumes of off-book funding is a negative for NBFCs, especially those for whom securitisation / bilateral assignments were an important funding source. As per ICRA’s analysis of the balance sheets of over 20 top NBFCs, with Assets Under Management (AUM) aggregating to over Rs. 2,00,000 crore, in the case of 3 NBFCs—with AUM of around Rs. 50,000 crore—the share of off balance sheet funding exceeds 35%, while for most of the others, it is less than 15%. The Top 9 NBFC’s with high reliance on assignment/securitization have aggregated assets under management of Rs. 1,60,000 crore(approx) including assigned/securitised book of Rs 31,000 crore (approx) as on December 31, 2011, which are primarily in the form of assignment transactions. In case we treat these as securitization transactions and apply the capital treatment as prescribed by the revised guidelines ICRA estimates the aggregate CRAR would drop by approximately 2.23% (0.93% in Tier 1 CRAR and 1.30% in Tier 2 CRAR) from 19.49% to 17.26% (Tier 1 from 14.53% to 13.60%), which would be well above the RBI guidelines of 15% for Total CRAR and 10% for Tier 1 CRAR. At an individual level as well, ICRA does not envisage capital adequacy to below the prescribed minimum regulatory requirement for these players. Further most of the NBFCs were amortizing the income on premium assignment transactions, therefore ICRA does not envisage the change in income booking policy to have an impact on profitability indicators and ROE of these players.Requirements to be met by investing banks
Banks investing in securitisation transactions are expected to be able to demonstrate a comprehensive and thorough understanding of the risk profile of their investments. They are expected to meet strict own due diligence requirements and have skilled manpower and systems to carry out the process. Also they are expected to perform appropriate stress testing pertaining to their positions and monitor the performance of the underlying exposures on a regular basis. Though some banks have started conducting their own due diligence on the portfolio they are investing in, however, given that many banks may not have the adequate systems in place to comply with the stipulated requirements, they have been given a time frame till 30 September 2012 to put necessary systems and procedures in place to be able to comply with the requirements of the guidelines (however, the guidelines leave scope for some subjectivity in this direction). Failure to meet the norms would attract a risk weight of 1111% to the securitisation exposures from 1 October 2012 onwards.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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