Non-bank financials -New securitisation guidelines on balance positive ::Macquarie Research,

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India Non-bank financials
New securitisation guidelines on
balance positive
Event
 The RBI came up with revised draft guideline on securitisation. On balance
we view the guidelines are positive for the two retail NBFCs in our coverage-
SHTF and MMFS.
Impact
 Relief on due diligence of securitised pools. As per draft guidelines, a
bank should do due diligence on the loans it buys from NBFCs. However
while buying retail loans, a bank can utilise a third party to do due diligence. In
that case it needs to verify only 5% of the retail loans, whose due diligence
the third party has already done, by its own bank employees. These 5% loans
are to be randomly chosen This we think is a significant relief because
verifying the full portfolio of numerous retail borrowers would have been
onerous and impractical for the bank.
 What is adverse? The amount available for securitisation itself for SHTF/
MMFS would shrink materially.
NBFCs will now have to keep loans on their books for 6 months (instead
of 3-4 months currently) if the instalment is made monthly or 12 months if
the instalments are quarterly or less frequent. The majority of loans we
believe would be having monthly repayments. This additional 2-3 months
itself may shrink the portfolio available for securitisation by ~10% or more.
First loss cover provided plus loans retained by the originator (i.e. NBFCs)
would have to be 10% of the total loan portfolio. That may mean
additional ~2% portfolio being retained for Shriram Transport as they
provide ~7-8% as first loss.
 What the guidelines do not address? Is the basic question whether loans
bought by banks from NBFCs will continue to get priority sector lending status
from RBI in future as well.
 What is our base case? That securitisation would continue for both Shriram
and MMFS but to a lower extent than previously. This is based on our belief
that banks would not want this source of priority loans to dry up when they are
anyway facing problems to meet their existing priority targets.
Outlook
 We maintain our negative stance on retail NBFCs because of their expensive
valuations, slower growth and shrinking margins.