Money & Banking

To help NBFCs hit by liquidity crisis, RBI reduces minimum holding period

Our Bureau Mumbai | Updated on November 29, 2018 Published on November 29, 2018

In a bid to help non-banking finance companies (NBFCs) overcome liquidity issues in the backdrop of the IL&FS imbroglio, the Reserve Bank of India has cut the minimum holding period (MHP) requirement for NBFCs raising funds via securitisation of loans of original maturity above 5 years.

In respect of loans of original maturity above 5 years, the minimum number of instalments to be paid before securitisation is now six monthly instalments (12 earlier) or two quarterly instalments (four).

Project risk

As per the MHP requirement, originating NBFCs can securitise loans only after these have been held by them for a minimum period in their books. The criteria governing determination of MHP for assets are aimed at ensuring that the project-implementation risk is not passed on to the investors, and a minimum recovery performance is demonstrated prior to securitisation to ensure better underwriting standards

The RBI has upped the Minimum Retention Requirement (MRR) for securitisation/assignment transactions involving loans of original maturity above 5 years to 20 per cent of the book value of the loans being securitised/20 per cent of the cash flows from the assets assigned. The MRR so far was 10 per cent of the book value of the loans being securitised.

MRR is primarily designed to ensure that originating NBFCs have a continuing stake in the performance of securitised assets so as to ensure that they carry out proper due diligence of loans to be securitised.

Securitisation is a process whereby an underlying pool of assets is packaged and sold as financial instruments to investors either directly or through a special purpose vehicle.

The move to tweak MHP and MRR should be seen in the context of the RBI not willing to open a separate liquidity window for NBFCs so that they can overcome liquidity mismatches, and apparent reluctance of banks to extend partial credit enhancement facility to NBFCs for raising funds via bonds.

Published on November 29, 2018
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