Non-Banking Financial Companies (NBFCs) play a vital role in lending to India’s micro, small and medium enterprises (MSMEs). But their growth is often limited by capital adequacy norms and balance-sheet constraints. Securitisation of MSME loans has emerged as a tool to unlock tied-up capital and improve liquidity.
What Is Securitisation?
Securitisation is the process of pooling loans and selling them as asset-backed securities to investors. For NBFCs, this means transferring a portion of their MSME loan portfolio to banks, mutual funds or institutional buyers for upfront cash.
Why It Matters for NBFCs
Frees Up Capital: By selling existing loans, NBFCs receive immediate funds that can be used to issue new credit.
Reduces Risk: Credit risk is partially transferred to investors.
Meets Regulatory Norms: Improves capital adequacy and leverage ratios.
Diversifies Funding: Less dependence on high-cost borrowings.
Impact on MSMEs
Smoother Credit Flow: NBFCs can keep lending to small businesses without waiting for repayments on old loans.
Potentially Lower Rates: Better liquidity can translate to more competitive pricing.
Broader Reach: Encourages NBFCs to extend credit deeper into Tier-II and Tier-III markets.
How the Process Works
NBFC identifies a pool of MSME loans.
Loans are bundled into a Special Purpose Vehicle (SPV).
SPV issues securities backed by these loans.
Investors purchase the securities and receive repayments from MSME borrowers over time.
NBFC receives upfront cash, improving liquidity.
Regulatory Framework
RBI’s 2021 Master Directions on Transfer of Loan Exposures (TLE) govern securitisation. They define minimum holding periods, credit enhancement norms, and disclosure requirements to ensure transparency.
Challenges to Watch
Due diligence costs and operational complexity.
Need for high-quality data on MSME borrowers.
Market appetite may fluctuate with economic conditions.
Conclusion
For NBFCs, securitisation of MSME loans is more than a balance-sheet tactic — it’s a growth enabler. By unlocking capital and managing risk, NBFCs can keep credit flowing to India’s small businesses, fueling entrepreneurship and job creation.
FAQ Section
Q1. What types of MSME loans can be securitised?
Both term loans and working-capital loans that meet RBI’s minimum holding period and performance criteria.
Q2. Does securitisation remove all risk for the NBFC?
No. NBFCs may still retain a small portion of the credit risk (known as credit enhancement).
Q3. How does this affect MSME borrowers?
Their loan terms don’t change; they continue paying EMIs as before, but the beneficial owner of the loan may be different.
Q4. Is securitisation only for large NBFCs?
Smaller NBFCs can also participate, often via co-lending or pooled securitisation arrangements.
Q5. Can banks also securitise MSME loans?
Yes, but NBFCs tend to use it more aggressively to free up capital.
Published on : 18th September
Published by : SMITA
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