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Shriram Transport
Finance Co. Ltd.
Quick Comment: RBI
Change in Priority Sector
Norms – Impact Analysis
What’s new? The Central Bank has removed the
priority sector status for “on-balance sheet” bank lending
to NBFCs (i.e. loans by banks to NBFCs like Shriram).
This current change will not impact the bank purchase of
securitized loans from STFC, which for now will continue
to be eligible for priority sector status.
What’s the impact of this move on STFC?
What proportion of STFCs loans come from banks?
STFC currently accesses about 2/3 of their total funding
from the banking system – about 22% via “on-balance
sheet” funding and the balance 40% via securitized
loans (see Exhibit 1 for funding mix breakdown). Prior to
this change, both on-balance sheet and securitized
loans were eligible for priority sector classification by
banks.
No impact on on-balance sheet lending per
management: If the funding cost for on-balance sheet
loans move up by 1% -- it would impact STFC’s PBT by
~5% (we provide a sensitivity analysis in Exhibit 2).
However, we note that management has indicated that
the “on-balance” sheet funding that STFC received from
banks has always been at commercial terms and in their
view received no significant rate benefit on account of
the priority sector eligibility status of the loan – hence
there is no direct impact from this move.
They indicated that out of this Rs. 90 bn of on balance
sheet funding, for Rs. 30-40 bn the banks did seek for
legal documents from Shriram while making the
disbursements to prove that the loans were indeed
made to small road transport operators which would
enable classification of the loans as priority sector
Securitized loan book not impacted by current RBI change:
This funding (Rs. 165 bn, 40% of total) historically has enjoyed
a lower cost of 150-200 bps (the incremental benefit has been
lower at 100-125 bps) as they helped banks fulfill direct priority
sector requirement. In addition, securitization as a funding
source has additional benefits in the form of lower capital
requirement and reduction in duration mis-match (spreads on
these loans are locked in. The securitized book is not impacted
by the RBI change and will continue to be eligible for priority
sector classification.
Regulatory uncertainty could weigh on stock performance
in the near term: Although there is no direct impact on STFC’s
profitability from the current move – the uncertainty with
regards more adverse regulatory changes (particularly with
regards STFC’s securitization) has increased. This, coupled
with macro uncertainty, will likely weigh on STFC’s stock
performance in the near term, in our view.
The RBI has two committees whose recommendations could
have a bearing on STFC’s business dynamics – 1) RBI is
appointing a committee to re-examine the existing
classification and suggest revised guidelines with regard to
priority sector lending classification (no timeline is indicated on
this). 2) The Reserve Bank has constituted a Working Group to
examine the regulatory framework pertaining to NBFCs in India.
This committee is expected to submit its recommendations by
June 2011.
Is there an impact on banks? Domestic banks are required to
park 40% of their loan book in sectors that are considered
important from a development perspective including agriculture,
small enterprises and exports. If banks are unable to meet their
priority sector requirements, they have to park their funding in
mandated low yielding investments.
Most SOE banks have been able to fulfill their priority sector
requirements organically owing to the vast rural/semi-urban
network. Private sector banks use inorganic means to fulfill
priority sector requirements. One of the more lucrative such
avenues is to lend to / buy pools of assets from higher yielding
segments such as MFIs, gold finance companies and CV
financing (like STFC)
In F2010, we estimate that about 6% of the system’s
incremental priority sector lending came from these higher
yielding segments. Indeed, if we exclude SOE banks from total
system wide priority sector lending (since they tend to originate
loans organically) – the higher yielding segments accounted for
almost 25-30% of incremental priority sector lending.
Today’s move does not impact all of the above – since
securitization still qualifies as a priority sector. However, we
believe that some negative impact is likely on margins,
particularly for the private sector banks
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport
Finance Co. Ltd.
Quick Comment: RBI
Change in Priority Sector
Norms – Impact Analysis
What’s new? The Central Bank has removed the
priority sector status for “on-balance sheet” bank lending
to NBFCs (i.e. loans by banks to NBFCs like Shriram).
This current change will not impact the bank purchase of
securitized loans from STFC, which for now will continue
to be eligible for priority sector status.
What’s the impact of this move on STFC?
What proportion of STFCs loans come from banks?
STFC currently accesses about 2/3 of their total funding
from the banking system – about 22% via “on-balance
sheet” funding and the balance 40% via securitized
loans (see Exhibit 1 for funding mix breakdown). Prior to
this change, both on-balance sheet and securitized
loans were eligible for priority sector classification by
banks.
No impact on on-balance sheet lending per
management: If the funding cost for on-balance sheet
loans move up by 1% -- it would impact STFC’s PBT by
~5% (we provide a sensitivity analysis in Exhibit 2).
However, we note that management has indicated that
the “on-balance” sheet funding that STFC received from
banks has always been at commercial terms and in their
view received no significant rate benefit on account of
the priority sector eligibility status of the loan – hence
there is no direct impact from this move.
They indicated that out of this Rs. 90 bn of on balance
sheet funding, for Rs. 30-40 bn the banks did seek for
legal documents from Shriram while making the
disbursements to prove that the loans were indeed
made to small road transport operators which would
enable classification of the loans as priority sector
Securitized loan book not impacted by current RBI change:
This funding (Rs. 165 bn, 40% of total) historically has enjoyed
a lower cost of 150-200 bps (the incremental benefit has been
lower at 100-125 bps) as they helped banks fulfill direct priority
sector requirement. In addition, securitization as a funding
source has additional benefits in the form of lower capital
requirement and reduction in duration mis-match (spreads on
these loans are locked in. The securitized book is not impacted
by the RBI change and will continue to be eligible for priority
sector classification.
Regulatory uncertainty could weigh on stock performance
in the near term: Although there is no direct impact on STFC’s
profitability from the current move – the uncertainty with
regards more adverse regulatory changes (particularly with
regards STFC’s securitization) has increased. This, coupled
with macro uncertainty, will likely weigh on STFC’s stock
performance in the near term, in our view.
The RBI has two committees whose recommendations could
have a bearing on STFC’s business dynamics – 1) RBI is
appointing a committee to re-examine the existing
classification and suggest revised guidelines with regard to
priority sector lending classification (no timeline is indicated on
this). 2) The Reserve Bank has constituted a Working Group to
examine the regulatory framework pertaining to NBFCs in India.
This committee is expected to submit its recommendations by
June 2011.
Is there an impact on banks? Domestic banks are required to
park 40% of their loan book in sectors that are considered
important from a development perspective including agriculture,
small enterprises and exports. If banks are unable to meet their
priority sector requirements, they have to park their funding in
mandated low yielding investments.
Most SOE banks have been able to fulfill their priority sector
requirements organically owing to the vast rural/semi-urban
network. Private sector banks use inorganic means to fulfill
priority sector requirements. One of the more lucrative such
avenues is to lend to / buy pools of assets from higher yielding
segments such as MFIs, gold finance companies and CV
financing (like STFC)
In F2010, we estimate that about 6% of the system’s
incremental priority sector lending came from these higher
yielding segments. Indeed, if we exclude SOE banks from total
system wide priority sector lending (since they tend to originate
loans organically) – the higher yielding segments accounted for
almost 25-30% of incremental priority sector lending.
Today’s move does not impact all of the above – since
securitization still qualifies as a priority sector. However, we
believe that some negative impact is likely on margins,
particularly for the private sector banks
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