By Nidhi Bothra,

Microfinance Focus, September 28, 2011: RBI on 27th October, 2011, released the revised draft for the much awaited securitization guidelines. The draft guidelines have reduced the minimum risk retention requirement and have altered the minimum holding period requirement from what was proposed in the April, 2010 draft guidelines. In case of loans having monthly payments, and having an original maturity of upto 24 months, as in case of microfinance loans, the MHP will be 6 months from the due of date of the first installment.

Further, in case of eligibility of assets for securitization, securitization with revolving structures (with or without early amortization) is not eligible for securitization by the originators. Section C of the revised draft that talks about securitization activities that are not permitted includes, Securitisation with Revolving Structures, and states as below -

These involve exposures where the borrower is permitted to vary the drawn amount and repayments within an agreed limit under a line of credit (e.g. credit card receivables and cash credit facilities). Typically, revolving structures will have non-amortising assets such as credit card receivables, trade receivables, dealer floor-plan loans and some leases that would support non-amortising structures, unless these are designed to include early amortization features. xxx

The extract above indicates that only typical revolving structures are barred; specifically in cases which involve exposures where the borrower is under a line of credit, such as credit card receivables and cash credit facilities. In case of microfinance pools, there is no line of credit being provided and hence are not barred.

There is a difference between reinstating structures and revolving structures. In reinstating structures, the repayment of the loan is by way of EMIs, but these loans are sold on regular basis, whereas in case of revolving structures as used in credit card receivables, repayments are within an agreed limit under a line of credit and the exposure varies. The intent of the RBI, it so seems is to put a bar on the revolving type structures and not against reinstating structures.

Hence in case of microfinance securitization, the MFIs would have to hold the loans in their books for 6 months and then can securitise. As the microfinance securitisations as well as portfolio sales have been recognized as priority sector exposures in the hands of the buying banks, it so seems that refinancing facilities for microfinance entities would be reviving and so would the securitization market in India.

The revised draft guidelines permit upfront profit recognition, however, to the extent of the profit encashed upfront, that is, the sale consideration exceeding the carrying value of the assets. The Feb 2006 Guidelines of the RBI had prohibited booking of profits, but the same was not extended to bilateral transactions. However, bilateral transactions are well covered by the revised draft guidelines. Upfront recognition of cash profits is favorable and is in line with the international practices.

While the revised draft guidelines have relaxed the MRR and MHP requirements, trying to bring them in line with international practices, the draft indicates that RBI is only concerned with banks as originators to the securitization transactions and the entire draft is revolving around banks undertaking securitization transactions only. However we are assuming that the same would be extended to NBFCs mutis mutandis in the final version.

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About the Author: Ms. Nidhi Bothra is Vice President at Vinod Kothari Consultants and can be contacted at nidhi@vinodkothari.com

Disclaimer: Views expressed in the article by the author are his own and do not necessarily represent those of Microfinance Focus. Microfinance Focus does not take any responsibility for correctness of the data presented by contributor.