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Regulatory dispensation on securitization transactions
Yet another funding option for NBFCs especially HFCs
In a press release today, the RBI decided to relax the Minimum Holding Period (MHP) requirement for originating NBFCs, in respect of loans of original maturity above 5 years, to receipt of repayment of six monthly instalments or two quarterly instalments. This has been reduced from the earlier tenure of 12 months or four quarterly instalments. These guidelines would be applicable to HFCs as well.
However, the Minimum Retention Ratio (MRR) for such transactions has been increased from 10% of the book value of the loans being securitized/10% of the cash flows from the assets assigned to 20% of the book value of the loans being securitized/20% of the cash flows from the assets assigned.
The above dispensation is applicable to securitization/assignment transactions carried out during a period of six months from the date of issuance of the circular.
In our opinion, this should be beneficial largely to HFCs only, because they have loans of 5-year+ maturity. We believe DEWH and IHFL will be the big beneficiaries among HFCs, since they have a higher share of off-BS assets compared to peers and their reliance on sell-downs as a means of fund raising has been greater in these times of tight liquidity.
Our analysis suggests that the incremental pool of assets eligible for securitization/assignment transaction is ~INR1.6t (based on our calculation as described later). However, many HFCs such as LICHF, GRUH, CanFin and Repco do not sell down assets. Hence, incremental pool of assets eligible for securitization/assignment for those HFCs that sell down assets is ~INR1.3t. Within an MRR of 20%, this would lead to potential funding possibility of INR1t via sell-downs.
While this may not be a big boost alone, we believe the RBI and government are taking several steps to address the liquidity issues. These include (a) increased portfolio buyouts by PSU Banks, (B) Increase in refinance limit by NHB from INR240b to INR300b and potentially to INR500b as per media articles, (c) RBI’s OMO of INR360b in Oct and proposed INR400b in December and (d) Revised guidelines on partial credit enhancement for long-term NCDs issued by NBFCs and HFCs. We believe these steps would help allay investor concerns.
Reiterate preference for NBFCs with strong parentage and higher share of retail lending
While the liquidity situation has been improving over the past two months (CPs worth INR1t+ rolled over in November, as per reports), higher cost of funds and slowdown in growth will impact the sector as a whole. We believe the impact will be particularly pronounced for wholesale financiers. HFCs with better parentage and higher share of pure retail home loans would have easier access to debt capital, in our view. Also, vehicle financiers have better pricing power, and thus, should be able to largely manage spreads in this environment. The RBI and government have been taking steps to improve the situation, which should address investor concerns. We reiterate our preference for NBFCs with a strong credit rating, good parentage and a retail balance sheet. Our top picks are HDFC, SHTF, MMFS and LICHF.
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