Shadow lenders may be gasping for cash, but their securitized loans are selling like hot cakes, even in the midst of a raging liquidity crisis.
Non-banking financial companies (NBFCs) and housing finance companies (HFCs) raised ₹2.36 trillion through the securitization route between October 2018 and September 2019, data compiled by rating agency Icra showed.
While NBFCs and HFCs are selling securitized loans amid tight liquidity, it also highlights buyer interest. The heightened issuance of pass-through certificates (PTC) and direct assignments (DA), two kinds of loan sell-downs, began with the system-wide liquidity crunch sparked by the collapse of Infrastructure Leasing and Financial Services Ltd in September 2018.
An executive director at a private bank said requesting anonymity that though banks were wary of lending to certain NBFCs and HFCs, they do not mind buying pooled assets since the risk is lower. He said banks were finding it more prudent to buy retail assets than lending to NBFCs.
Bank purchases of such loan pools backed by assets help inject liquidity into non-bank lenders. Banks often buy loans from shadow lenders comprising securitized retail loans to meet the shortfall in priority sector lending.
For instance, in January, mortgage lender Dewan Housing Finance Corp. Ltd (DHFL) had raised ₹1,375 crore from funds managed by Oaktree Capital Management through securitization of loans. Then, Mint reported in August that public sector lender Bank of Baroda (BoB) planned additional exposure of ₹10,675 crore to NBFCs in the second quarter of FY20. BoB was looking to purchase NBFC assets worth ₹5,600 crore.
Earlier this year, BoB also bought loans worth ₹3,000 crore from DHFL. However, this transaction was used to adjust against the bank’s loans to the NBFC.
A senior executive of a large public sector bank said the deals were done on the basis of an NBFC’s liquidity requirements. “At times, NBFCs engage in securitization to use the proceeds for fresh loans and, depending on our assessment of the loans, we go ahead with the transaction."
In November 2018, the Reserve Bank of India (RBI) had relaxed the minimum holding period (MHP) requirement for originating NBFCs, for loans of maturity above five years, from 12 months earlier to six months. The MHP is the duration for which an NBFC is required to hold the loans on its book before selling them. The central bank has extended this relaxation till 31 December 2019.
Meanwhile, a recent judgment by the Bombay High Court in a case pertaining to DHFL has put the spotlight on the risks associated with these transactions.
Acting on a motion filed by Reliance Nippon Life Asset Management Ltd, the high court on 10 October extended the stay on payments by DHFL to its creditors. Following this, rating agency Icra on 15 October downgraded six securitized loan pools of DHFL.
“Moreover, now we are seeing that even securitization of assets has its own set of problems. With the Bombay high court stopping all payments by DHFL, lenders who had bought these pools will be affected," the executive director cited above said.
Abhishek Dafria, vice-president and head, structured finance ratings, Icra, said the partial credit guarantee scheme (PCG) of the Centre will add bulk to the overall market volumes.
“With the public sector banks directed to disburse funding of ₹1 trillion under the PCG scheme by February 2020, we believe that the size of the securitization market will be at an all-time high, in excess of ₹2 trillion for FY20," said Dafria.