RBI final guidelines on securitization will consider implications on microfinance feedback

August 12, 2010 5:19 AM EDT

At the Inaugural Address by Shyamala Gopinath, Deputy governor of the Reserve Bank of India at the India Securitisation Summit 2010 hosted by the National Institute of Securities Markets (NISM), August 10, 2010, Mumbai, says that RBI is examining the responses and the final guidelines for banks as well as NBFCs will be issued after taking into account the feedback. From her speech, it is reflected that RBI aware about possible implications of recent draft guidelines on Securitization on microfinance sector.

The recent draft guidelines on securitization issued in April 2010 stipulate a minimum holding period (MHP) and a minimum retention requirement (MRR) by the originators. The guidelines envisage MHP of 9 months and 12 months respectively for loans with maturity of less than 24 months and more than 24 months. Similarly, the MRR for loans with maturity of less than 24 months and more than 24 months has been proposed as 5% and 10% respectively. Banks will not be permitted to hedge the credit risk in the retained exposures counting towards the minimum retention requirements.

According to the Deputy Governor, RBI has received feedback mainly briefly relates to the following:

Level playing field between banks and NBFCs as regards MRR and MHP – On the one hand, there is a view that given the intrinsic nature of loans given by the NBFCs, particularly in the microfinance sector, stringent requirements may hamper lending in these critical areas.

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On the other, there is the regulatory arbitrage issue which necessitates ensuring that the incentive structures do not again result in a shadow banking system.

Applicability of the guidelines to direct assignment transactions.

Category-specific relaxations for MHP

Relaxation of MRR requirement for retail loans

Treatment of ‘time-tranched’ issuances as against ‘credit tranched’ issuances

Relaxation in respect of the ‘total exposure’ norm

Further she said, “In the Indian context, ‘sustainable securitisation’ can indeed play a positive role in financial intermediation provided there is genuine transfer of risk away from the banking system. The existing and proposed guidelines are in line with international practices and may appear stringent but in the long term, it is imperative that securitisation market develops for the right reasons. It is also necessary to promote standardization to facilitate risk assessment and valuation and eventually enable the trading of these securities on the exchanges.”

“There are serious data issues and as regulators of banks and NBFCs, it may become imperative for the RBI and the SEBI to put in place a robust reporting mechanism for primary issuances as well as secondary market data”, she added.

(Disclaimer: By arrangement with Microfinance Focus. All copy rights reserved by Microfinance Focus. International Business Times is not responsible for any omissions or commissions in the article.)