NHB mulls entity for securitisation; housing finance to get a leg-up

By: |
June 22, 2021 5:30 AM

This special purpose entity (SPE) is expected to be established as a non-banking financial company (NBFC) and regulated by the Reserve Bank of India (RBI). The entity will help deepen the securitisation market, resolve bad loans and widen funding avenues for housing finance companies (HFCs).

housingRepresentational image

State-run National Housing Bank (NHB) is planning to set up an entity for mortgage-backed securitisation in a joint venture with one or more partners, sources told FE, in a significant step towards developing a structured market in this space.

This special purpose entity (SPE) is expected to be established as a non-banking financial company (NBFC) and regulated by the Reserve Bank of India (RBI). The entity will help deepen the securitisation market, resolve bad loans and widen funding avenues for housing finance companies (HFCs).

The NHB may hold a majority stake (51%) in the SPE initially, and the remaining capital may be raised from multi-lateral agencies. Its holding would be trimmed gradually once more investors join in.

The move is in sync with the 2019 recommendations of the Harsh Vardhan committee set by RBI, which had envisaged an anchor role for the NHB in a securitisation venture. The SPE will issue securities against underlying exposures that are all mortgages – both commercial and residential.

Highlighting the lack of standardisation in the housing finance securitisation space as an “important constraint”, the Harsh Vardhan panel had suggested that a credible intermediary (under the NHB) be set up “that can not only evolve these standards with industry inputs but also commit capital to securities that adhere to these standards”.

Given the NHB’s credibility and expertise in the housing finance segment, any such entity under it will have the greater ability (than any other firm) to raise capital from investors. It will also allow separation from the NHB’s lending/refinance activities.

The RBI panel had recommended that the shareholding of the entity be diversified, going forward, to include representatives of the originator community such as HFCs, banks and insurance companies, among others. The stakes of originator investors should be capped at 5% to avoid conflicts of interest.

Under the government’s “Housing for All” target by 2022, 8-10 crore additional houses will be required to be built, which will cost about Rs 100-115 lakh crore, the panel had observed. In this light, HFCs would continue to play a key role in extending credit. However, home loans typically suffer from a structural asset-liability management issue for the lenders due to a mismatch in the long-term maturity period of the loans and short-term funding sources for HFCs. To beat this, HFCs usually mop up resources by pooling home loans to issue securities backed by these loans via securitisation.

The extant regulatory framework for securitisation typically covers two types of transactions — direct assignment (DA) and pass-through certificates (PTC). Both involve pooling of loans and selling to a third party to transfer credit risk.

The securitisation market has been dominated by direct assignment (DA) transactions and the PTC ones were just a quarter of overall transactions in 2019. This prevents large-scale participation of big investors, such as insurance and pension funds and mutual funds. This is because securitisation through the DA route typically involves customised, bilateral transactions that keep key details – including about valuation, pool performance and prepayment – confined to the parties concerned.

However, where securitisation involves the PTC, the pooled loans are sold through an intermediary, set up as a special purpose vehicle. This process is typically more transparent and helps standardisation.

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