RBI Panel Offers Path to Develop Home Loan Securitisation Market

A new intermediary should be created to standardise the underlying mortgage loans, underwriting guidelines and loan servicing standards, the panel says.

An RBI (Reserve Bank of India) panel appointed to suggest ways to make the home loan securitisation market more attractive has suggested the create an intermediary for standard-setting and market-making for securitised instruments.

The intermediary should be created by the NHB (National Housing Bank) – now a refinance and supervisor institution after its regulatory powers shifted to the RBI last month – to standardise underlying mortgage loans, underwriting guidelines and loan servicing standards.

“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.”

Under the proposal, the new intermediary would start with INR 5 billion (USD 70 million) in capital and would be allowed to invest up to 5 percent in each pool it securitises, or 5 percent of its own capital base. A total aggregate limit of 50 percent of capital can be set as the limit for all market-making activities.

The recommendation is aimed at helping to develop the securitisation market so that it can emerge as a reliable complement to other sources of funding for home lenders, the committee said. Currently, the top five HFCs (housing finance companies) account for 85 percent of the total home loan securitisation market; the rest depend almost entirely on bank loans.

The report says that a better-developed securitisation market will enable smaller firms to access funds more easily, as well as reduce volatility in their funding. It notes that well-developed securitisation markets in other jurisdictions have been found to enable greater funding stability as they tend to be countercyclical, with volumes rising when capital markets fall, and vice versa.

The committee also recommends different rules for mortgage- and asset-backed securities, some regulatory relaxations, and that home loans be linked to an external benchmark, among other proposals.

The recommendations come amid expectations of significant growth in India’s mortgage market in the coming year. The report says India will need between 80-100 additional housing units by 2022, at a cost of INR 100-115 trillion.

The full report is available here.

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