RBI reduces risk weight for consumer credit
To ease liquidity and boost demand, the Reserve Bank of India on Thursday notified the reduction in risk weightage for consumer credit, excluding credit card receivables.
 
The risk weight for consumer credit, including personal loans, but excluding credit card receivables was reduced from 125 per cent to 100 per cent. 
 
The consumer credit, including personal loans and credit card receivables excluding educational loans, attracted a higher risk weight of 125 per cent or more.
 
Effectively, the move will free up capital from the banking sector which would have been set aside while extending such loans.
 
Last month, the RBI in "Developmental and Regulatory Policies" changes had announced: "Under the standardised approach for 'Credit Risk Management', consumer credit, including personal loans and credit card receivables attract a higher risk weight of 125 per cent or higher, if warranted by the external rating of the counterparty."
 
"On a review, it has been decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100 per cent."
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    RBI panel for govt role in housing finance securitisation
    The Reserve Bank of India's committee on the development of 'Housing Finance Securitisation Market' has recommended setting up a government sponsored intermediary to "enable market making and standard setting".
     
    The committee, in its report to the RBI, has recommended that "an intermediary to promote housing finance securitisation with the primary functions of standard-setting and market making should be established by National Housing Bank". 
     
    "It is also proposed that this entity would have 51 per cent ownership by the government through the NHB initially. The government ownership in the entity would then be gradually reduced to 26 per cent over a period of 5 years.
     
    "The entity will start with Rs 500 crore of initial capital... the intermediary would be allowed to invest in each pool it securitises to the extent of 5 per cent of the pool or 5 per cent of its own capital base, whichever is lower," it said in the report.
     
    The committee also pointed out the need to develop standards for "loan origination, loan servicing, loan documentation, and loans to be eligible for securitisation, including standardised formats for data collection and aggregation".
     
    Besides, it called for a separation of regulatory guidelines for "direct assignment transactions and transactions involving pass through certificates" as well as for mortgage-backed securities (MBS) and asset-backed securities (ABS).
     
    "Relaxation of regulatory norms for minimum holding period (MHP) and minimum retention requirement (MRR) for MBS; amendments and/or clarifications for registration and stamp duty requirements and tax guidelines to reduce the transaction costs for securitisation as also to encourage investments in pass-through-securities," were also recommended.
     
    The committee was set up to review the existing state of mortgage securitisation market in India and make recommendations to address various issues relating to investors as well as market microstructure.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Rating Divergence across Rating Agencies Could Soon Be a Thing of the Past Says SBI
    With market regulator Securities & Exchange Board of India (SEBI) asking all rating agencies to do probability of default (PD) benchmarking for their AAA, AA and A ratings, the divergence across rating agencies could soon be a thing of the past, says a research note. 
     
    With rising instances of defaults and investors’ concerns around the role of rating agencies in timely evaluation of the possible risks, sudden transition of rating and deteriorating credit profiles of firms, in June this year, the market regulator had come out with a set of wider disclosure norms for external credit rating agencies (ECRA). 
     
    In the report, State Bank of India (SBI) says, "On the positive side, the SEBI approach would certainly bring in tighter credit assessment, comparability of ratings across issuers, to an extent, even across countries and, of course, more scrutiny and accountability in light of disclosure requirements put in place. However, as a logical corollary, rating agencies may go conservative to comply with the directions, in assigning rating which may lead to higher risk weights and so as the capital requirements for the banks. One view is that the new guidelines would moderate ratings and our country would have lesser number of AAAs and AAs. Additionally, it should also raise the requirement of bank capital requirements." 
     
     
    Subject to any unexpected legal event impacting such with certain permitted tolerance levels, SEBI has asked all rating agencies to do PD benchmarking for AAA, AA and A the rating categories. 
     
    For example, AAA rated companies is expected to deliver a benchmark default rate of zero over a two-year horizon with a tolerance of 1% is permissible when default is measured over a three-year period. 
     
    "Though SEBI has directed zero tolerance level for one year default for AAA, AA without tolerance and for A with 3% tolerance level, we observe divergence in PD itself across rating agencies. For example, in AAA category though the PD is zero in CRISIL and ICRA, it is 0.51% and 0.80% in CARE and India Rating, respectively. Similarly, stability rate indicates the proportion of rating that remain unchanged over a period. It is observed that CRISIL has stability rate of 98.84% in AAA whereas CARE and India Rating have 97.07% and 95% respectively. For, AA rated borrower also while CRISIL's stability rate is 95.68% for CARE and India Rating the same is 93.70% and 93.20%, respectively," SBI says.
     
     
    According to the research note, there is divergence in stability rates across rating agencies. stability rate indicates the proportion of rating that remain unchanged over a period. SBI says, "It is observed that CRISIL has stability rate of 98.84% in AAA whereas CARE and India Rating have 97.07% and 95% respectively. 
     
    For, AA rated borrower also while CRISIL’s stability rate is 95.68% for CARE and India Rating the same is 93.70% and 93.20%, respectively. Higher stability rate indicates lower volatility. ECRA should aspire for a better stability rate across investment grade and which could also be a parameter to rate the performance of rating agency."
     
    SBI says the new directives from SEBI will help achieve three things. Firstly, it says, the SEBI approach would certainly bring in tighter credit assessment, comparability of ratings across issuers and of course, combined with detailed appraisal and assessments to look at credit quality of each and every loan proposal. 
     
    "Secondly, new guidelines would moderate ratings and our country would have lesser number of AAAs and AAs. Additionally, it should also raise the requirement of bank capital requirements. Thirdly, one consequence of such lesser number of AAA rated borrowers is that it will result in diversification of ratings across categories. For example, most of the corporate issuance in India is currently of top credit quality, with AAA till AA- papers accounting for about 80% of all issuance while BBB or worse accounted for only 14%. This shows that the corporate bond market is largely accessible to the top rated borrowers. Thus MSME have no recourse to corporate bond markets in India and have to rely on banks for credit. Hopefully, a better diversification of ratings could help MSMEs to tap markets."
     
    "Such a diversification could result in better trading in corporate bond market. As we see now, corporate bond market annual bond (trade) market is only around Rs15 to Rs18 lakh crore, meaning thereby on an average only Rs1.5 lakh crore worth of bonds are being traded monthly, with the outstanding corporate bonds of more than Rs30 lakh crore, as on March 2019, SBI says in the report.
     
    The bond market in India currently lacks depth mainly because of structural impediments in the markets, including dominance of issuances by financial sector entities, prevalence of private placements, very limited market liquidity, and restrictions on institutional-investor allocations to non-investment-grade bonds, it also lacks confidence on the rating front too, especially from the retail investors.
     
    SBI says, "With revised SEBI norms and better stability ratio coupled with transparent and structured disclosures, investor confidence will increase which leads to a better and robust secondary market with increased participation from the retail investors too."
     
     
    In addition, over a longer time horizon, banks should experience lower impairments and better stress test outcomes, with beneficial impact on baseline stress test related capital requirements. Investor confidence will also increase with SEBI's move, which leads to a better and robust secondary market with increased participation from the retail investors too, the report concluded.
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