The Reserve Bank of India just made it a lot easier for the country’s shadow banks to sell off their loans
RBIhas halved the minimum holding period for loans with a maturity of more than five years. NBFCs will now be able to sell off these loans after six months.
- The one-year restriction was in place to ensure that the loan was being serviced regularly prior to sale by the
NBFCto another financial institution.
- The move will provide a much needed dose of
liquidityto the balance sheets of these lenders, which have faced a significant cash crunch in the wake of the IL&FS bankruptcy scare.
The move will provide a much needed dose of liquidity to the balance sheets of these lenders. They have faced a significant cash crunch in the wake of the IL&FS bankruptcy scare as commercial banks, which are already dealing with an unprecedented level of
As per an official notification, the RBI has halved the minimum holding period for loans with a maturity of more than five years to six months. NBFCs will now be able to sell off these loans after the six-month period which entails the receipt of two quarterly repayments or six monthly instalments. Prior to the ruling, NBFCs were only allowed to securitise these loans after receiving payments, be it on a monthly or a quarterly basis, after one year.
The restriction was put in place to ensure that the loan was being serviced regularly prior to sale by the NBFC to another financial institution. Otherwise, it would increase the risk of the loan turning non-performing and could be used as a ploy by an NBFC to get rid of a bad asset without sufficient liability.
However, the reduction in the minimum holding period may have an adverse effect as the purchaser will bear a greater level of risk of the asset turning bad.
Hence, to reduce, or more aptly, split the level of risk, the RBI has imposed a condition to the easing of the minimum holding period. NBFCs will have to retain 20% of the book value of the loans.
In the immediate term, it is predicted that NBFCs will sell off loans that have low default rates, such as mortgages and home loans. The influx of funds will help them sustain their core lending operations, which will provide some respite to India’s small-and-medium-enterprises, which rely heavily on NBFCs for their working capital needs.
The easing of restrictions is slated to last for only six months, after which it may or may not be extended. Meanwhile, the RBI is expected to propose some additional measures to boost liquidity at NBFCs after the next meeting of its board on 14 December.
India’s central bank has scrapped the licenses of nearly 400 NBFCs so far this year
The Reserve Bank of India is trying to prevent a liquidity crisis at banks by relaxing an important risk requirement
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