8 May 2012

Update

India Financials

RBI releases Final Securitization Guidelines; In line

with draft guidelines; Lower MHP a positive

RBI has released the final securitization guidelines for banks (which will also be

effectively made applicable to NBFCs) based on the feedback received from

various stakeholders. While, the guidelines are largely in line with the draft

guidelines issued earlier, reduction in MHP is a positive. Key highlights:



The Minimum Holding Period (MHP) for loans with different maturities and

repayment schedules has been lowered v/s that proposed in the earlier

draft guidelines. For loans with monthly repayment schedule (which largely

impacts NBFC-AFCs), the MHP has been halved across various loan tenors.

The guidelines remain status quo on some of the other important

parameters such as 1) Minimum Retention Ratio (MRR) 2) upfront profit

booking on securitization 3) disallowing credit enhancements through direct

assignment route and 4) disqualifying of loans with bullet repayment of

principal and interest from the ambit of securitization.



Our View:



The final securitization guidelines clear air over uncertainty related to asset

securitization norms for NBFCs. The final guidelines are largely in line with

the draft guidelines with some dilution in the minimum holding period

(MHP) criterion, which is a positive.

For NBFC-AFCs, reduction in MHP augurs well for players like SHTF and

MMFS, and would allow them to continue with their securitization activity.

However, maintaining status quo on withdrawal of credit enhancement on

direct assignment transactions would negatively affect MMFS as it curbs

MMFS’ ability to do loan assignments.

We believe the same has already been priced in and should not have any

material impact on MMFS’ earnings: 1) since FY12. MMFS has stopped

upfronting of profits from securitization income and started amortizing the

same 2) income from securitization constitutes less than 5% of its total

income from operations 3) securitization / assignment as a funding resource

constitutes less than 15% of its overall liability mix. In case the company

decides to forego this route for its funding requirements, there could be a

margin impact of 20-25bp, which we believe could be recovered either

through loan re-pricing or adopting securitization route as against

assignment route currently.

There is no respite for gold loan companies as final guidelines maintain

status quo on disallowing loans with bullet repayment of principal and

interest from ambit of securitization and assignment. First Page Sub

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India Financials

Key Highlights

:

Minimum Holding Period (MHP):



The Minimum Holding Period (MHP) for loans with different maturities and

repayment schedules has been lowered v/s that proposed in the earlier draft

guidelines. For loans with monthly repayment schedule (which largely affects

NBFC-AFCs), the MHP has been halved across various loan tenors.

Reduction in MHP would not hamper the ability of NBFC-AFCs to securitize loans

due to higher holding period, which is a positive.

The MHP, in the final guidelines, has been defined with reference to the

number of installments to be paid prior to securitization. MHP applicable to

various loans depending upon the tenor and repayment frequency is as follows:





As proposed in FINAL GUIDELINES

As proposed in the DRAFT GUIDELINES

Source:

Minimum Retention Ratio (MRR)





The Minimum Retention Ratio criterion has been kept unchanged by the RBI

from what was proposed in the draft guidelines.

The RBI has proposed a MRR of 5-10% based on the maturity of the asset. The

MRR guideline ensures that the originator has a continuing stake in the

performance of securitized assets so as to ensure that proper due diligence is

carried out on the part of the originator of loans before securitization.

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8 May 2012

India Financials



We believe this is unlikely to have a material impact as the proposed MRR also

includes the credit enhancements and first loss, which companies already

provide for currently (although lower than 10%). As a result, the companies only

have to bear the incremental cost on securitization of assets, which is unlikely to

create a significant impact on their earnings.

Other Proposed Measures:



Booking of Profit Upfront:

RBI proposes to allow limited recognition of cash

profits arising from securitization transactions (subject to various conditions).

This is equivalent to amortizing income / profit through securitization of assets

over the asset life. This will not have any material impact for players such as

SHTF and MMFS as they are already amortizing the income over the life of the

asset.

Tightening disclosure norms:

RBI proposes to tighten disclosure norms by

making it mandatory for the originator to disclose weighted average holding

period of the assets securitized and the level of their MRR in the securitization,

materially relevant data on the credit quality and performance of the individual

underlying exposures, etc besides various disclosures to be made in the annual

accounts of the originator.

Reset of Credit Enhancement:

RBI would come out with a separate circular on

reset of credit enhancements in case of securitization transactions.



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8 May 2012

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India Financials

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8 May 2012

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