RBI Loan Securitisation Norms for NBFC

The Reserve Bank of India (RBI) has tightened loan securitisation norms for non-banking finance companies (NBFC) by setting a 95 per cent cap on the loans it is selling to another company.

The NBFC will have to retain a minimum 5 per cent of the loan being sold to another entity. The revised guidelines issued by the RBI also stipulate that NBFC cannot sell or securitise a loan unless three monthly installments have been paid by the borrower.

This is being done to prevent unhealthy practices like origination of loans for the sole purpose of securitisation and in order to align the interest of the originator with that of the investors and with a view to redistribute credit risk to a wide spectrum of investors.

It was felt necessary that originators should retain a portion of each securitisation and ensure more effective screening of loans, the central bank said.

RBI said a loan up to two years could be securitised only after payment of three monthly installments by the borrower. The limit for loans between two and five years is six monthly installments and above five years, 12 monthly installments.

With regard to minimum retention requirement (MRR) for securitisation, RBI said the NBFCs selling loans would have to retain 5 per cent of the amount if the loan is for less than two-year period and 10 per cent if it is of over two years.

The originating NBFCs should disclose to investors the weighted-average holding period of the assets securitised and the level of their MRR in the securitisation.

They should also ensure that prospective investors have ready access to relevant data on the credit quality and performance of the individual underlying exposures, cash flows and collateral supporting a securitisation exposure, RBI said.

NBFCs should formulate policies regarding the process of due diligence to be exercised by their own officers to satisfy about the Know Your Customer requirements and credit quality of the underlying assets.NBFCs will not be permitted to carry out re-securitisation of assets and synthetic securitisation, ie, bundling of assets with different risk profile.NBFCs have been asked to implement these guidelines in two phases ending October this year.