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UBS Investment Research
India Banking & Finance Sector
D raft securitisation guidelines
�� Event: securitisation draft guidelines released
The guidelines have been addressed to banks and it is unclear if it is applicable to nonbanking
financial companies (NBFCs) currently. The guidelines prescribe a minimum
holding period (6-12 months) and a minimum retention ratio (5-10%). The minimum
holding period requirement effectively rules out issuances by gold finance companies
and microfinance institutions (MFI), which have a short-duration loan book.
�� Impact: not as disruptive as feared
If applicable, it is positive for asset finance companies such as Shriram Transport
Finance (SHTF) and Mahindra Finance (MMFS) as the uncertainty surrounding
securitisation would recede and transactions would pick up. The guidelines are silent
about the treatment of credit enhancements with regard to capital adequacy, which
continues to remain the key source of regulatory arbitrage between banks and NBFCs.
�� Action: positive for SHTF, MMFS; not a big impact on gold fincos
We are positive on gold finance companies. An inability to securitise is not a disruptive
change, in our view, as the cost gap between off- and on-balance sheet assets has been
non-existent with the removal of priority sector status on gold loans. We believe SHTF
should benefit in the near term; however, the overhang posed by weak AUM growth
persists.
�� Unintended consequences for banks too
These guidelines could potentially impact the loans sell-down business of banks (Axis
Bank, Yes Bank)—it has been a strong fee income contributor over the past two years.
We estimate ~10% of fee income contributed by loan syndication/sell-down, part of
which could be impacted due to the holding period requirement of 6-12 months.
The key message in the RBI guidelines, in our view, seems to be to discourage
“originate to distribute” transactions and to retain some risk with the originators
so as to maintain underwriting standards for off-balance sheet assets similar to
on-balance sheet assets.
The key features of the guidelines are:
1) A minimum holding period of six months for most cases; 9-12 months
for a few cases before the asset can be securitised;
2) A minimum retention ratio of 5-10%;
3) Credit enhancements will not be allowed on assigned loans. This leads
to sharing of risk between buyer and seller (current practice is seller
bears first losses), which could either raise the cost of carrying out
assignments as credit losses get priced in or it could lead to buyers
preferring to do more securitisation instead of assignments.
�� Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit, increase NPL risk,
impact fee income, and exert pressure on NIM.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Banking & Finance Sector
D raft securitisation guidelines
�� Event: securitisation draft guidelines released
The guidelines have been addressed to banks and it is unclear if it is applicable to nonbanking
financial companies (NBFCs) currently. The guidelines prescribe a minimum
holding period (6-12 months) and a minimum retention ratio (5-10%). The minimum
holding period requirement effectively rules out issuances by gold finance companies
and microfinance institutions (MFI), which have a short-duration loan book.
�� Impact: not as disruptive as feared
If applicable, it is positive for asset finance companies such as Shriram Transport
Finance (SHTF) and Mahindra Finance (MMFS) as the uncertainty surrounding
securitisation would recede and transactions would pick up. The guidelines are silent
about the treatment of credit enhancements with regard to capital adequacy, which
continues to remain the key source of regulatory arbitrage between banks and NBFCs.
�� Action: positive for SHTF, MMFS; not a big impact on gold fincos
We are positive on gold finance companies. An inability to securitise is not a disruptive
change, in our view, as the cost gap between off- and on-balance sheet assets has been
non-existent with the removal of priority sector status on gold loans. We believe SHTF
should benefit in the near term; however, the overhang posed by weak AUM growth
persists.
�� Unintended consequences for banks too
These guidelines could potentially impact the loans sell-down business of banks (Axis
Bank, Yes Bank)—it has been a strong fee income contributor over the past two years.
We estimate ~10% of fee income contributed by loan syndication/sell-down, part of
which could be impacted due to the holding period requirement of 6-12 months.
The key message in the RBI guidelines, in our view, seems to be to discourage
“originate to distribute” transactions and to retain some risk with the originators
so as to maintain underwriting standards for off-balance sheet assets similar to
on-balance sheet assets.
The key features of the guidelines are:
1) A minimum holding period of six months for most cases; 9-12 months
for a few cases before the asset can be securitised;
2) A minimum retention ratio of 5-10%;
3) Credit enhancements will not be allowed on assigned loans. This leads
to sharing of risk between buyer and seller (current practice is seller
bears first losses), which could either raise the cost of carrying out
assignments as credit losses get priced in or it could lead to buyers
preferring to do more securitisation instead of assignments.
�� Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit, increase NPL risk,
impact fee income, and exert pressure on NIM.
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