RBI rule on securitization of loans may hit fintech lenders

On December 5, the RBI updated its 2021 guidelines on securitization of standard assets or those that are regularly repaid. This circular prevents lenders from securitizing loans due in less than 365 days.

Securitization is the merging of assets into repackaged interest-bearing securities.

“Fintech lenders in India typically lend on a short-term basis, consisting of three-six month products. They have developed an expertise in this segment. We have seen fintechs tapping into the securitization market recently and some transactions have already been completed,” said Vineet Jain, Senior Director, Care Ratings Ltd.

Jain said that while not many fintechs do so, among other things, the RBI circular restricts them from accessing the market, which has gained good traction. Securitization is not only a funding avenue for fintechs, but it also allows these lenders to demonstrate to investors their ability to originate and service loans.

Care Ratings said in a note on November 8 that the aggregate secondary market volume of financiers and microfinance institutions (MFIs) in gold loans may not be significantly affected as there is no such limitation on the balance sheet period for loans sold under transfer of loan exposures.

It said the proportion of contracts with balance periods shorter than one year was very small for most asset classes and these assets were most likely to be sold through the direct allocation route.

Others believe that asset classes that have short tenor loans such as MFIs, gold loans and short-term personal and durable consumer loans will be affected by the regulatory change. However, analysts point out that such a short-term securitization would affect about 5% of the market and therefore is unlikely to cause much disruption.

According to India Ratings and Research, the total volume of pass-through certificates in FY22 was ₹57,000 crore, of which microfinance PTC (pass through certificate) securitization accounted for around 9%. It believes that the number of such issuances may decline in the short term as the amount of assets to be securitized will shrink.

“Gold loans have a term of six to 24 months. In the last two years, securitization of gold loans has shown an increase. With the minimum holding period requirement, it would not be possible to securitize the group of gold loans that have a remaining maturity of less than 12 months or a total maturity of 15 months or below,” India Ratings said.

Crisil pointed out that the minimum holding period for housing loans is now linked to the date of full disbursement, or registration of security interest with the Central Registry of Securitization Asset Reconstruction and Security Interest of India, whichever is later.

“Gold loans and some unsecured personal loans offered by non-bank financial companies initially have maturities ranging from a few months to two years. The shorter maturities, combined with the minimum term of three months, and the spice filters used by investors can cause many of these loans to fall short of the minimum remaining term of 365 days, says Krishnan Sitaraman, senior director and deputy chairman. rating officer, Crisil Ratings Ltd.

The impact on other asset classes such as vehicle finance, small and medium business loans and home loans is expected to be limited given their original loan tenures of three or more years, Sitaraman said.