Converting home loans into marketable security seen infusing liquidity into HFCs
Move could help housing finance companies address their asset-liability mismatch
Developing a mortgage-backed securitization market could help housing finance companies (HFCs) address their asset-liability mismatch, a senior executive at PNB Housing Finance Ltd said in an interview.
“In a country like ours, where the debt market is so shallow, it is very difficult for long-term lenders like us to have matching liabilities. When securitization, the way we have suggested, comes up with the intermediary NHB (National Housing Bank), then the market will open up to EPFO (Employee Provident Fund Organisation), mutual funds, insurance companies and public provident funds, which provide long term funds," said Sanjaya Gupta, managing director and chief executive officer of PNB Housing Finance.
In September, the Reserve Bank of India had released a report by the committee on the development of a housing finance securitization market.
Mortgage securitization refers to the process of converting a bundle of home loans into a marketable security.
Apart from securitization of home loans, the committee had also suggested measures to standardize loan origination, servicing and data collection, along with setting up of a government-led intermediary through NHB to enable market-making and standard- setting.
“There is need for securitization to infuse liquidity into non-bank lenders and it will catch up because banks have been recapitalized, most are out of PCA (prompt corrective action) and they are looking for growth. Even as CASA (deposits in current and savings accounts) have grown significantly, their other investments are not doing well," said Gupta.
PNB Housing’s liquidity situation remains comfortable with assets under management (AUM) growing at an average of 45% annually between FY16 and FY19 to reach ₹84,722 crore on 31 March. However, several other mortgage lenders continue to face challenges due to unpredictable maturity that can go up to even 25-30 years. Considering that HFCs primarily rely on bank borrowings and capital markets to meet their capital requirements, the maturity of their assets (home loans) is much longer than that of their liabilities, which poses a maturity mismatch problem.
At present, the securitization market in India is divided into two kinds of transactions: rated pass through certificate (PTC) transactions and unrated direct assignment (DA) transactions. While PTCs are rated and issued against mortgage-backed securities via a special purpose vehicle, DA involves bilateral assignment of retail loan pools from one entity to another. In times of a credit crunch, marked by bank lending constraints, securitization proves to be a preferred funding model for non-bank lenders.
Between April and June, the Indian securitization market, within which mortgage loans constitute the largest asset class, clocked the highest issuance volumes seen in the first quarter of any fiscal year at ₹50,300 crore, growing by 56% over the year-ago period, according to a 15 July report by Icra Ltd.
While PTC transaction volumes grew by a whopping 95% to ₹22,000 crore, the volumes for DA deals, which constitute 46% of the securitization market, increased by around 35% to ₹28,300 crore.
“Today, unfortunately, in the secondary market, direct assignment is the only viable way to borrow funds, and as a lender you have to bear with all the due diligence. Provided we have standardization and an intermediary that clubs various loans in homogeneous pools, gets them rated and offers them as a security paper, it will allow institutional investors to buy these securities, bringing in a much deeper penetration in the debt market," added Gupta.
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