A Reserve Bank of India (RBI) panel, which was tasked with reviewing the existing state of housing finance securitization, and suggest measures to make the market more attractive, has recommended that an intermediary be set up under the National Housing Bank (NHB), wherein the government will have a 51% ownership.
The six-member committee, which was set up on 29 May under the chairmanship of Harsh Vardhan, senior advisor, Bain and Co., has submitted its report to RBI governor Shaktikanta Das, the central bank said on Monday.
Mortgage securitization involves pooling of loans and selling them to a special purpose vehicle (SPV), which then issues securities, called pass-through certificates (PTCs). The PTCs will be backed by the loan pool.
Securitization is a mechanism to convert illiquid loans on the lenders’ balance sheet into tradable securities.
The report said the intermediary could operate either directly through the NHB, the Indian Mortgage Guarantee Corp., or the RBI could set up a new organisation.
“Weighing up these options, the committee recommends that the intermediary be created as an NBFC, a majority-owned subsidiary of NHB to start with, and regulated by the RBI," it added.
According to the report, NHB already has the broad mandate to develop this market and the proposed functions are permissible under the NHB Act. The advantages of this are threefold, it said. First, this entity can be regulated by the RBI; second, it can expand its capital base to support growing business by raising capital from other (private) investors; and third, this will allow separation from the lending and refinancing activities of the NHB. “It is also proposed that this entity would have 51% ownership by the government through the NHB initially. The government ownership in the entity would then be gradually reduced to 26% over a period of five years. The remaining capital of 49% may be initially raised from multilateral agencies," the report added.
The panel recommended that this intermediary will start with ₹500 crore of initial capital and it would be allowed to invest in each pool it securitizes to the extent of 5% of the pool, or 5% of its own capital base, whichever is lower. “An overall aggregate limit of 50% of capital of the intermediary can be set as the limit for market making activities," it said.
The report pointed out that India suffers from housing shortage, and the situation could worsen with the increase in population. Citing analysts and government estimates, it said India will need 80-100 million additional housing units by 2022 at an estimated cost of ₹100-115 trillion.
The committee also said that the RBI should develop standards for loan origination, loan servicing, loan documentation, and for the loans eligible for securitisation, including standardised formats for data collection and aggregation. It also suggested separation of regulatory guidelines for direct assignment transactions and transactions involving PTCs, as well as for mortgage-backed securities and asset-backed securities.