More than one crore retail borrowers eligible for the three-month moratorium on loan repayments announced by the Reserve Bank of India (RBI) under its ‘Covid-19 – Regulatory Package,’ have not been able to benefit from the rule relaxation yet.
That’s because non-banking finance companies (NBFCs) which gave the loans have already securitised them – that is, pooled future receivables or repayments into pass-through-certificates (PTCs) and sold them to investors such as banks, NBFCs, mutual funds, insurers and high-networth individuals.
These investors are yet to approve the moratorium on underlying loans and reschedule most PTC repayments because they don’t have clarity on the impact such a move will have on the valuation of their investments. As per extant rules, any rescheduling will force reclassification of the investments as ‘restructured’. That would raise provisioning requirements and cost, and impact marked-to-market (MTM) valuations.
While a revision in securitised loan repayments because of moratorium would be as per the RBI’s guidance, and the resultant change in PTC repayment schedules in line with the pass-through nature of such transactions, ambiguity persists on both provisioning and valuation.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, “Even if a moratorium is not granted, MTM losses and provisioning costs on many securitisation transactions could rise because the credit enhancements on them would deplete substantially over the next two months, and reduce the cushion available to absorb future credit losses. Any erosion in the credit quality of PTCs would trigger a downgrade in their rating, affecting valuations and provisioning requirements. So not granting a moratorium will not address the valuation or provisioning concerns adequately, but it would considerably increase the financial burden of the borrowers.”
If the current stalemate continues and rating downgrades and defaults increase materially, securitisation transactions can decline, which would affect a significant funding source of NBFCs.
Says Rohit Inamdar, Senior Director, CRISIL Ratings, “Any further delay by PTC holders in extending moratorium to securitised loans could add to the financial hardship of borrowers in a difficult environment. The date for repayment instalments are typically in the first half of the month and NBFCs will have to debit borrower accounts. If there is no moratorium, they will need extensive efforts to collect dues. Our estimate is that one crore borrowers, whose loans were packaged into PTCs through ~700 transactions, would be significantly impacted.”
CRISIL, on its part, is closely monitoring the market developments and their impact on all its rated securitised instruments, and will take suitable rating actions as appropriate.