In what has come as a respite for both non-banking finance companies and new private banks, the Reserve Bank of India, on July 1, cleared the air on whether assets securitised by NBFCs will be treated as priority sector lending (PSL).

This move will benefit asset financing companies such as Shriram Transport and Mahindra & Mahindra Financial Services that raise funds from securitisation of loans. These stocks were up 2.7 per cent and 6 per cent respectively on Monday.

While NBFCs can use securitisation as one of the fund raising avenues, this benefits private sector banks as well. The latter can use asset-backed securities to meet their PSL requirement.

Private banks, given their limited rural reach, find it hard to meet their PSL targets directly and therefore invest in securitised pools that in turn represent such loans.

The other option available for them if they do not meet their PSL target is to invest in Rural Infrastructure Development Fund (RIDF) which yields a very low rate of interest, at times even below their average cost of funds.

As of March 2011, around 45 per cent of Shriram Transport's assets-under management were securitised while Mahindra Finance had around 17 per cent of funds coming by the way of securitisation.

The net spread earned by Shriram Transport on its securitised loans (done only on new vehicle loans) is 5-6 per cent, around the same as it earns on direct lending. Around 34 per cent of the operating revenues come from securitisation income for Shriram Transport Finance which is indicative of the importance of this avenue of financing. During the time when RBI is concerned about sharp rise in loans to NBFC sector, securitisation would aid the future disbursement growth of these NBFCs.

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