MICROCAPITAL BRIEF: Reserve Bank of India Requires Microfinance Institutions to Hold Loans for 9 Months Before Securitizing

The Reserve Bank of India (RBI), India’s central banking authority, has announced that lenders must follow new regulatory standards before securitizing their loans for sale to investors. Loans that have maturity periods of up to two years must be held by the originating firm for a minimum period of nine months, and the originating institution must retain at least five percent of the loan in its books. Loans with a maturity of two years or greater must be held by the originator for a minimum of one year with the originating institution retaining at least 10 percent of the loans after selling them off. Additionally, retail lenders will be required to carry out regular stress tests and other forms of portfolio monitoring on an ongoing basis.

The new regulations were implemented in response to some finance companies originating loans and then quickly selling them off to commercial banks through securitization deals. Since the originating institution is able to transfer the risk of the loan to the investor, which may be unable to ascertain the risk of the security, the incentives for the originating institution can become misaligned.

By Cameron Milani, Research Associate

About the Reserve Bank of India: Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.

Sources and Additional Resources:

LiveMint, “RBI Tightens Norms on Securitization Deals,” http://www.livemint.com/2011/09/27231348/RBI-tightens-norms-on-securiti.html?h=B

MicroCapital.org story, June 3, 2011, “MICROCAPITAL BRIEF: Costs Rise for Indian Microfinance Institutions (MFIs) Looking to Securitize Loan Portfolios From 10% to Over 12%” https://www.microcapital.org/microcapital-brief-costs-rise-for-indian-mic…

Reserve Bank of India, “Extracts from Second Quarter Review of Monetary Policy for the Year 2009-10” http://rbidocs.rbi.org.in/rdocs/content/PDFs/DGSD270911.pdf

MicroCapital.org story, June 12, 2011, “MICROCAPITAL BRIEF: Reserve Bank of India Proposes Regulation for Securitizations by Microfinance Institutions” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-pro

MicroCapital Universe Profile: Reserve Bank of India https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

 

 

 

 

 

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