'Treating deposits under RIDF as part of priority sector lending may affect new securitisation issuances'

MUMBAI: The Reserve Bank of India guidelines on treatment of Rural Infrastructure Development Fund for calculation of priority sector lending for banks may have a negative impact on new securitisation issuances, according to ratings firm Care Ratings.

On May 15, 2014 RBI issued a circular allowing outstanding deposits placed by banks under of Rural Infrastructure Development Fund ( RIDF), Warehouse Infrastructure Fund, Short Term Co-operative Rural Credit Refinance Fund and Short Term RRB Fund with Nabard to be treated as part of indirect agriculture and be counted towards overall priority sector target achievement.

The outstanding deposits under the above funds with Nabard as on preceding March 31st will form part of adjusted net bank credit. As a result, the increase in the ANBC alone, considering the outstanding balances of the RIDF and other funds will lead to an increased direct agriculture lending target of around Rs15000 crore for banks, according to Care.

Hence, the change in treatment of outstanding deposits in RIDF and other funds may dampen securitisation issuances in the near term, although the magnitude of the impact is as yet unclear, reckons Care.

Indian retail asset securitization market rated volumes have decreased marginally by around 6% to Rs 28300 crore in FY14 as against Rs 30300 crore in FY13. In FY’14 there was greater clarity with the introduction of a new tax regime in Union Budget. But the market started moving towards ‘direct assignment’ route due to a combination of factors making it an attractive proposition for both the originators as well as the investors.

Securitization market was primarily driven by direct assignments or direct sale of loans till FY12. But, after the introduction of new RBI Guidelines in FY13 which stipulated that no credit enhancement may be provided for direct assignment transactions, the market started moving towards special purpose vehicles or SPV/ Pass Through certificates or PTC route as investors were more comfortable with the safety of credit enhancement provided in the SPV/PTC route vis-à-vis a direct assignment.

If mutual funds enter the market retail asset securitization would receive a shot in the arm which could off-set the impact of the RBI circular regarding the outstanding RIDF balances, said Care.