The Reserve Bank of India (RBI) amended its Master Directions on Securitisation of Standard Assets on December 5, Monday, barring securitisation of loans with residual maturity of less than 365 days — other than for trade receivables.

This would limit the issuance of pass-through certificates (PTCs) backed by shorter tenure loans originated by non-banking finance companies (NBFCs).

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.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Rating Officer, CRISIL Ratings Ltd, “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% 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.”

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.

Investors prefer PTCs for the securitisation of such loans because they offer credit enhancements to investors to cushion against credit losses and collection volatility. Overall, PTCs account for ~80% of securitisation volume backed by these loans.

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.

Says Rohit Inamdar, Senior Director, CRISIL Ratings, “Adjustments to product lines can enable new-age NBFCs operating in the personal loan space to tap the securitisation market. Changes in tenure profiles are now being visible among these NBFCs, with longer-tenure personal loans of 3-5 years being extended to borrowers backed by revised underwriting policies. Such a shift will augur well for new-age NBFCs in terms of access to the securitisation market, as their loan products become compliant with the residual maturity requirements as per the revised guidelines.”

In other asset classes, highly amortised pools of microfinance and two-wheeler loans that have typical original tenures of two years could also be impacted. However, this can be addressed through appropriate adjustments to the seasoning filters and excluding such highly amortised contracts in securitisation transactions.

Hence, while the revised guidelines could be negative on securitisation in the short-term, the impact should reduce over the medium term as originators adapt to the regulatory amendments.