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Shriram Transport Finance Co. Ltd.
Priority Sector for Securitized Loans: Status Quo Continues; But Outlook Still Uncertain
Quick Comment: The Reserve Bank of India has
released the master circular on bank lending to micro,
small and medium enterprises (MSMEs). The circular
specifies that investments by banks into securitized
assets will continue to be eligible for classification under
priority sector (direct or indirect). Hence, it could be
interpreted that the status quo of priority sector status for
STFC’s securitized loans continues. We believe that
given the nature of master circulars (see details below),
impending RBI committee recommendations (on NBFCs
and priority sector norms) – the outlook on whether there
will be further regulatory changes still remains uncertain.
What are master circulars? Every year (on July 1) –
RBI releases master circulars on various aspects related
to bank regulation. The master circulars are issued “to
enable the banks to have current instructions at one
place, a Master Circular incorporating the existing
guidelines/instructions/directives on the subject has
been prepared and is appended. This Master Circular
consolidates the instructions issued by the RBI up to
June 30, 2011, which are listed in the Appendix, to the
extent they deal with the MSME sector lending by
commercial banks.”
The language in this year’s master circular on priority
sector status eligibility for securitized loans is the same
as that published in last year’s master circular. Given
that the master circular is a one-stop summary of the
current guidelines and that RBI hasn’t issued any new
guidelines notifications/clarifications on this issue – the
language should have ideally remained unchanged.
RBI committee recommendations could provide more
clarity: The RBI has two committees whose recommendations
could have a bearing on this issue –1) The Reserve Bank has
constituted a Working Group to examine the regulatory
framework pertaining to NBFCs in India. This committee was
expected to submit its recommendations by June 2011. 2) 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).
Why is this potential regulatory change important for
STFC? STFC currently accesses about 2/3 of their total
funding from the banking system – about 22% via “on-balance
sheet” funding and the balance of 40% via securitized loans
(see Exhibit 1 for funding mix breakdown). In May 2011, RBI
has already removed the priority sector status for STFC’s
on-balance sheet funding. This has created uncertainty about
whether securitized loans would also face a similar change.
The funding via securitization (Rs. 165 bn, 40% of total)
historically has enjoyed a lower cost of 150-200 bps
(incrementally the benefit has been lower at 100-125 bps) as
they helped banks fulfill direct priority sector requirements. In
addition, securitization as a funding source has additional
benefits in the form of lower capital requirements and reduction
in duration mis-match (spreads on these loans are locked in).
Hence, if removed/curtailed it could have implications for
profitability, margin volatility and capital utilization at STFC
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport Finance Co. Ltd.
Priority Sector for Securitized Loans: Status Quo Continues; But Outlook Still Uncertain
Quick Comment: The Reserve Bank of India has
released the master circular on bank lending to micro,
small and medium enterprises (MSMEs). The circular
specifies that investments by banks into securitized
assets will continue to be eligible for classification under
priority sector (direct or indirect). Hence, it could be
interpreted that the status quo of priority sector status for
STFC’s securitized loans continues. We believe that
given the nature of master circulars (see details below),
impending RBI committee recommendations (on NBFCs
and priority sector norms) – the outlook on whether there
will be further regulatory changes still remains uncertain.
What are master circulars? Every year (on July 1) –
RBI releases master circulars on various aspects related
to bank regulation. The master circulars are issued “to
enable the banks to have current instructions at one
place, a Master Circular incorporating the existing
guidelines/instructions/directives on the subject has
been prepared and is appended. This Master Circular
consolidates the instructions issued by the RBI up to
June 30, 2011, which are listed in the Appendix, to the
extent they deal with the MSME sector lending by
commercial banks.”
The language in this year’s master circular on priority
sector status eligibility for securitized loans is the same
as that published in last year’s master circular. Given
that the master circular is a one-stop summary of the
current guidelines and that RBI hasn’t issued any new
guidelines notifications/clarifications on this issue – the
language should have ideally remained unchanged.
RBI committee recommendations could provide more
clarity: The RBI has two committees whose recommendations
could have a bearing on this issue –1) The Reserve Bank has
constituted a Working Group to examine the regulatory
framework pertaining to NBFCs in India. This committee was
expected to submit its recommendations by June 2011. 2) 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).
Why is this potential regulatory change important for
STFC? STFC currently accesses about 2/3 of their total
funding from the banking system – about 22% via “on-balance
sheet” funding and the balance of 40% via securitized loans
(see Exhibit 1 for funding mix breakdown). In May 2011, RBI
has already removed the priority sector status for STFC’s
on-balance sheet funding. This has created uncertainty about
whether securitized loans would also face a similar change.
The funding via securitization (Rs. 165 bn, 40% of total)
historically has enjoyed a lower cost of 150-200 bps
(incrementally the benefit has been lower at 100-125 bps) as
they helped banks fulfill direct priority sector requirements. In
addition, securitization as a funding source has additional
benefits in the form of lower capital requirements and reduction
in duration mis-match (spreads on these loans are locked in).
Hence, if removed/curtailed it could have implications for
profitability, margin volatility and capital utilization at STFC
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