The Reserve Bank of India extends NBFC Securitization

Securitization is the process wherein an entity sells its non-tradable assets in exchange for cash in the illiquid market to raise capital. Recently, the Reserve Bank of India has extended NBFC securitization for the next six months.

Such a move has acted as a great relief for the existing Non-Banking Financial Companies (NBFCs) since it is an opportunity for NBFCs to repair their broken balance-sheets.  Also, it will help them to recover from liquidity crises by selling the assets.

A Synopsis of the Report

Here is a sneak peek into the RBI’s decision:^[1]

• In November 2018, the RBI for the first time had relaxed the minimum holding period (MHP) requirement for all the originating NBFCs.
• Thereby the MHP for loans of maturity was set above five years to six months from 12 months earlier. Originally, RBI has given NBFC securitization for six months only till May 2019.
• However, after that, the Central Bank extended the relaxation until 31 December 2019.
• While the Reserve of India has now decided to further extend the relaxation of NBFC’s asset securitization until 30 June 2020.

The reason behind NBFC Securitization Relaxation

The minimum holding period (MHP) stands for the duration for which an NBFC is bound to keep the loans on its book before selling them. Take a glance at the main reason to extend relaxation:

• Such relaxations get enabled after the liquidity crisis in the non-banking sector preceding to the defaults by (IL&FS)Infrastructure Leasing & Financial Services in 2018.
• It has a massive impact on NBFCs. Thus, NBFCs and its mortgage lending peers extensively relied upon on securitization deals to raise money.
• Besides a report of ICRA in October 2019 demonstrated that Non-Bank lenders had risen about ₹2.36 trillion by securitization in between October 2018 and September 2019.
• Therefore, the RBI got inclined to expand the relaxation period for NBFCs.

Shaktikanta Das outlook on the Matter

The Governor of Reserve Bank of India also articulated in point of view on NBFC securitization. He says:

• RBI will monitor the liquidity circumstances of the NBFCs for at least three months. The motive of that scrutiny is to discern whether NBFCs have enough coverage for their liquidity requirements in the next three months or not.
• He further says that “RBI wherever necessary will not hesitate to ensure that we do not enable any large or systemically essential NBFC to collapse or have any adverse impact on the economy.”
• As per Das, the credit flow has slowly revived in the NBFC sector, and the efficient ones get access to funds from the market at pre-IL&FS rates.
• Moreover, he showcases the present day scenario of the market which differentiates between the good and the not-so-good NBFCs.

The Bottom Line