RBI Committee Report on Development of Housing Finance Securitisation Market

The report by an RBI committee on the development of housing finance securitisation market headed by Harsh Vardhan, senior advisor, Bain & Co has made the following observations:

  • The home loans disbursed by banks and housing finance companies (HFCs) is expected to jump to Rs 35 lakh crore by the end of fiscal 2022, from Rs 20 lakh crore at March-end 2019. There will be compounding at an annual growth rate of 20 per cent.
  • India’s mortgage-to-GDP ratio remains low at present and is expected to grow significantly in the next few years. India’s mortgage-to-GDP ratio is currently at 9.6 per cent is significantly lower when compared to 18 per cent in China, 20 per cent in Thailand, 31 per cent in Korea, 34 per cent in Malaysia, 38 per cent in Taiwan, 52 per cent in Singapore and 56 per cent in the USA.
  • The low mortgage-to-GDP ratio reflects the low penetration of housing finance that can be attributed to several reasons. It also points to a very large opportunity for growth.
  • India’s mortgage-to-GDP ratio is estimated to rise to 12 per cent by 2022.
  • The compounding annual growth suggests significant growth in the housing sector.
  • Banks accounted for nearly 58 per cent out of the total home loan portfolio and HFCs had around 42 per cent of the total home loans. The recent liquidity crisis resulting from repayment in the NBFC sector could result in a temporary blip in loans advanced by HFCs, but long term growth remains intact.
  • There is a need for banks and HFCs to build funding models which address asset-liability mismatch in the home loan segment. The mismatch results are owing to the fact that banks’ and HFCs’ deposits tenure are much smaller than the duration of the home loan which is generally upwards of 10 years.
  • To address this mismatch the committee recommends securitisation of loan pools by pooling of loans and selling them to a special purpose vehicle, which then issues securities called pass-through certificates or PTCs backed by the loan pool.
  • The committee also recommended various steps, including setting up of a government-sponsored intermediary under the National Housing Bank for development of the home loan securitisation market. It is proposed that the Centre should exempt mortgage-backed securitisation from stamp duty as has been done in the case of asset reconstruction companies.

Home Loans and NPAs

Home loans have the lowest NPA levels of all classes of loans. The gross NPAs (in home loan segment) of banks were below 2 per cent in the last 5 years, HFCs reported gross NPAs of less than 1 per cent. The banking sector can strengthen their balance sheets by focusing on the sector.

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