RBI panel suggests setting up new entity to boost home loan securitisation

A Reserve Bank of India (RBI)-appointed committee to suggest ways to make housing loan securitisation market more attractive has suggested that the national housing bank (NHB) should create an intermediary for standard-setting and market-making for the instruments.

Securitisation is needed to widen the pool of resources available to housing finance companies (HFCs). Except for the top five HFCs, which account for over 85 per cent of the loans, the rest of the HFCs are dependent on bank loans and refinancing from the NHB, which is primarily now a refinance and supervisor institutions after the regulations shifted to the RBI. There are at least 90 HFCs registered with the NHB.

“Well-developed securitisation market can emerge as a reliable complement to other sources of funding for home loan lenders. Experience from countries with developed securitisation markets shows that securitisation tends to be counter-cyclical; volumes go up when liquidity in the overall capital markets is low and vice versa. A well-developed securitisation market can thus, reduce volatility in funding for lenders,” the report said.

The report estimated that the country will need anywhere between 80 million and 100 million additional housing units by 2022, while building those would cost Rs 100 trillion to Rs 115 trillion.

The report’s recommendations mostly centred on pass-through certificates (PTCs) — a form of securitisation where pooled assets are sold to a special purpose vehicle which issues securities against those assets.

But in India, most of the securitisation happens under direct assignment (DA) route, which is actually a form of loan sell-down. PTC, as a consequence, is just a quarter of the total volume of the securitisation market.

Key takeaways

• Top five HFCs constitute 85% of the total market
• Rest of HFCs dependent on bank loans and 
• NHB refinancing
• Securitisation can help smaller firms access funds easier 
• India will need 8-10 crore additional houses by 2022
• Cost of developing the houses would be Rs 100-115 trillion

The committee, headed by Harsh Vardhan, senior advisor at Bain & Company, said there should be balance between the DA and PTC forms of securitisation, so that the interests of small players are protected.

The committee said NHB should undertake efforts to establish the loan origination standards, at least for affordable housing loans, on a priority basis and set up the infrastructure for obtaining and disseminating pool performance data for all securitisation transactions.

Among major recommendations by the committee, a suggestion was made to set up an intermediary for mortgage-backed securitisation.

According to the committee, the lack of standardisation, in respect to the underlying mortgage loans, and underwriting guidelines followed by originators and also servicing standards followed by originator/servicers.

“The committee felt that the best option to drive such standardisation in the near- to medium-term would be a credible intermediary that can not only evolve these standards with industry inputs but also commit capital to securities that adhere to these standards.”

According to the panel, the refinance role of the NHB is not adequate for smaller HFCs, but the mission of this new intermediary would be the creation of a deep and vibrant market for mortgage-backed securities in India.

“The intermediary itself would aim to be commercially sustainable and not threaten the stability of the broader financial system through its activities,” the panel said.