New Delhi: Even as the US economy reels from the collapse of its housing mortgage market that spawned a global financial meltdown, Michael Bookstaber, a housing finance specialist and the global head of the housing finance group for International Finance Corp. (IFC), was in India to work on a country strategy with particular focus on the housing mortgage business. In an interview, Bookstaber spoke on the ongoing global financial crisis and IFC’s plans for India and its role in broadening the Indian market. Edited excerpts:
The crisis that’s enveloping the world right now… Is the worst over?
In my opinion, we are probably at the mid-point in terms of the underlying mortgage collateral and there is always a roll-through of that to the institutions that have financed it and the behaviour of the underlying financial instruments.
The way I see it, I think that there still is a roll-through of the ill conceived mortgages that have been banked over the last three or four years. The mortgages that have negative amortizations or option arms that have been made in the markets are now adjusting to market levels. The ability of the underlying borrowers to stand by those obligations is now bubbling to the surface.
We are now seeing just how robust those borrowers are and I think we are halfway through the cycle. I think we have another two years yet to see all this actually go through the system.
Has your investment strategy in this market been crystallized?
Advisory role: Michael Bookstaber, head of IFC’s housing finance group, says real private sector pension reform has not yet taken hold in India. Ramesh Pathania / Mint
This investment strategy is being crystallized. The focus area of this group (the housing finance group) is housing finance… What we can do in order to help develop this market more than we’ve done in the past. We have a few investments in this market. We have legacy investments. We’ve actually been one of the original investors in HDFC Ltd.
Do you have any investment targets and what will be percentage of housing finance in that?
I think we will. I think part of our strategy will be to try develop some targets but it’s still early days and we’re certainly not ready to give you any numbers on that. I can give you some global numbers, though.
Over the past five-six years, housing finance has become roughly 20% of all our global financial markets business. In some markets we are able to do more because the structures and institutions are more developed, so the percentage of our business is obviously higher than it has been in India or Bangladesh. But it’s not something that’s going to occur overnight.
As we are trying to develop our strategy, we are looking at a time horizon of, say, three-five years. And that will be reviewed and adjusted as the situation warrants.
One big impediment in housing finance in India is titling and issues that are related to it. And they are still being resolved. So how does IFC get around these structural impediments?
Our systems are attuned to what goes on in the local market. We can’t do more or less than others do. But what we can do is to work around them, if it’s possible. Because just by sitting on the sidelines and waiting for things to be solved doesn’t do anyone any good. We found that by engaging, we were able to accomplish a lot more.
So, as part of our strengths, we try to itemize for ourselves our major impediments and how extensive they are and find work-arounds. But parallel to that, we try to engage with our World Bank colleagues, try and engage with the local authorities to help them understand the extent of these impediments and how they could be changed to open up the market more.
Our activities can be divided in two. One is actual investing and one is advisory. The advisory side can perhaps be divided into another two, where we advise our clients helping them do their business a little bit better and also advise the authorities and help them improve the enabling environment.
Can you give me an example of working around these impediments?
Some of this comes out of our global experience. For example we’ve had some discussions over the past couple of days with some key people. One of the impediments to the growth of mortgage lending are the stamp duties and transfer taxes…. When it’s too high, you don’t get too many transactions.
I’ve been able to give examples about how we have been able to deal with this in some of the countries; about how we have been able to speak with the local authorities and so get happy results.
You mentioned stamp duties as being one of the impediments in the Indian market. What are the other impediments?
I can give you some very high-level global issues. I think making the links from the banking system and opening the pipeline between the banking system and long-term investors is the key in any market.
Because what we’d like to see is local currency lending taking place, when you see the financing taking place within the country itself.
Cross-border links sometimes have to happen but its always better if you can work within the system. From what I’ve been able to see, real private sector pension reform has not yet taken hold here.
There are long-term investors in this market, and from what I’m able to see there could be a pool of between $10 billion and 20 billion (between Rs46,300 crore and 92,600 crore).
That’s a substantial pool of long-term money. And any long-term investor should want to have an exposure in residential mortgage markets because that’s usually a very safe and sound investment. I’d still like to see mortgage market development take place along rational lines. Certainly in our client relationships here, we will try and foster that.
When you say that you want to raise resources here, are you looking at some kind of currency swap or floating bonds in the Indian market so that exchange risk does not get built in?
Not a currency swap. Let’s talk a bit in theory. If you were a private sector pension fund and you have to provide pensions, say, 20-30 years from now, these pensions would be rupee-denominated. You’d want to invest in rupees, long-term.
And if you wanted to buy a home and wanted to take a mortgage denominated in rupees and you are going to pay it over the next 20 or 30 years. So there is a natural match. The role that IFC may be able to play is to bridge the gap of uncertainty.
You as a long-term investor, you kind of scratch your head and say, ‘How safe will my investment be for the long term? Mortgage lending for 20 or 30 years really has not yet taken place. How do I know that the bank that makes the mortgage loan to you really knows what it is doing?’So IFC can step in and help bridge that. We can bring in a partial credit guarantee to an investment that you might make, that this investment that takes place will be along good internationally accepted, world-class lending standards.
Is it permissible under Indian law for IFC to guarantee domestic lending?
It is a gray area right now and one that we would like to make a white area.