Securitisation is the conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising cash by selling them to other lenders. Hence, in India, securitisation is an arrangement, largely done between NBFC and banks. Generally, banks give loans to NBFCs.
Since banks do not have a direct reach to rural customers or customers beyond large cities, they buy such securitized loans from NBFCs.
Lets understand securitisation in detail
Let us say that an NBFC regularly borrows money from a bank. As per RBI rules, the bank has to meet its priority sector lending targets.
Therefore, the bank will ask the NBFC to securitise a part of its eligible portfolio and acquire the same. The bank will now hold the securitised assets in its balance sheet and bear the credit risk on it.
What this does is that it provides liquidity to the NBFC by freeing up resources locked up in assets and also offers a lucrative price for such assets.
Also Read: RBI revises norms: Loans with residual maturity of less than 365 days cannot be securitised
Why does bank do securitization?
Banks mostly find it difficult to reach deeper geographies to serve the priority sectors. Manpower and expertise in acquiring and managing such business is also often lacking. NBFCs typically are well versed with local realities in the regions they operate and have a deeper reach within them. Hence, it makes a lot of sense for a bank to acquire loans from an NBFC to meet its priority sector lending targets.
Recent ruling by RBI:
Loans with residual maturity of less than 365 days cannot be securitized. Also, the loans must have a 3-month track record of repayment.
Its impact:
This can have an impact on securitisation volumes, but the quality of loans securitized could improve. Also, shorter duration loans won’t get securitized now.
Extent of securitization:
M&M Finance, Aavas Financiers Ltd. and Indostar Capital have the highest securitized portfolio among listed NBFCs. While AU Small Finance Bank, Bajaj Finance & IIFL Finance have securitization levels of under 3 percent of AUM.
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