Bar on short-tenure loan securitisation to affect 5% deals: Crisil

Securitisation deals involving gold and personal loan pass-through certificates (PTCs) could be affected due to the Reserve Bank of India’s bar on securitisation of loans with residual maturity of less than 365 days, according to Crisil Ratings.

The credit rating agency noted that this would limit the issuance of PTCs backed by shorter tenure loans originated by non-banking finance companies (NBFCs). However, direct assignments (DA) are not expected to be impacted.

PTCs are issued by trusts or special purpose vehicles to investors. DA entails direct sale of loans by originators – mostly housing finance companies and NBFCs – to banks. Investors in PTCs get protection against potential pool delinquencies through credit enhancement as compared to DAs.

Separately, the minimum holding period (MHP) for mortgages has now been linked to the date of full disbursement, or registration of security interest (with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India), whichever is later. This clears the fog around equitable mortgages, Crisil said in a note.

Krishnan Sitaraman, Senior Director and Deputy Chief Rating Officer, Crisil Ratings, said: “Gold loans and some unsecured personal loans offered by NBFCs have original tenures ranging from a few months to two years.

“The shorter tenures, combined with the MHP of three months, and seasoning filters applied by investors could lead to many of these loans coming up short on the minimum 365 days’ residual maturity norm.”

However, PTCs backed by these asset classes currently account for less than 5 per cent of the securitisation market. The impact on other asset classes such as vehicle finance, SME loans and mortgages is expected to be limited considering their original loan tenures of three or more years, opined Sitaraman.

The agency observed that the restriction on residual maturity of loans is not expected to apply to direct assignment (DA) transactions.

“Gold loan securitisation mostly happens via the DA route. This would thus cushion the impact on gold loan financiers, who also enjoy the safety of collateral.

“On the other hand, credit losses are usually higher for unsecured personal loans,” per the note.

Investors prefer PTCs for the securitisation of such loans because they offer credit enhancements to investors to cushion against credit losses and collection volatility, CRISIL said.

Overall, PTCs account for about 80 per cent of securitisation volume backed by these loans.

Digital NBFCs

The agency underscored that digital NBFCs operating in the personal loan space tap the PTC market to raise funds to augment their resources.

This is driven by lower funding cost that PTCs typically enjoy because of having a higher credit rating compared with the originator’s rating.

“Such digital NBFCs would now be restricted from accessing the PTC market if their loan products are not amenable to securitisation because of the new residual maturity rule.

“However, most of them have already been venturing into longer tenure personal loans, which can help them meet the residual maturity norms necessary to tap the securitisation market,” the agency said.

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