The central bank is proposing new rules to securitise mortgages and enhance their marketability, making it easier for home financiers and para banks to access cash and adding momentum to India’s corporate loans market.
The Reserve Bank of India’s (RBI) move would make additional liquidity available to non-banking finance companies (NBFC), which have a significant share in overall credit disbursement but are struggling to raise funds cheaply after the IL&FS defaults. To enable better management of credit and liquidity risks on the balance sheets of banks and HFCs and help lower the costs of mortgage finance in the economy, the RBI would constitute a committee that will assess the state of India’s housing finance securitisation market.
The panel would study international best practices and lessons from the global financial crisis to propose measures that would help develop these markets locally. It would come up with definitions of conforming mortgages, mortgage documentation standards, and digital registry for ease of due diligence and verification by investors.
“Recognising the benefits of an active secondary market in loans, the Reserve Bank will set up a task force to study the relevant aspects, including best international practices, and propose measures for developing a thriving secondary market for corporate loans in India,” said RBI in a statement.
The central bank would explore measures such as loan contract standards, digital loan contract registry, ease of due diligence and verification by potential loan buyers, online platform for loan sales and auctions, and accessible archive of historical market data on bids and sale prices for loans. RBI believes that the secondary market for loans can be an important mechanism for credit intermediaries to manage credit risk and liquidity risk on their balance sheets, especially for distressed assets.
“Loan sales can facilitate risk transfer across intermediaries that originate credit, such as banks and non-banking financial companies, and from credit originators to intermediaries, such as asset restructuring companies (ARCs), private equity (PE) funds, and alternative investment funds (AIFs),” said RBI.
At present, the secondary market for corporate loans in India is dominated by transactions of banks in non-performing assets and is constrained by sparse information on pricing and recovery rates. “The proposal to set up a committee on housing securitization markets and task force for secondary markets for corporate loans is a positive announcement for long-term development of the credit supply mechanism by attracting a wider set of investors,” said Karthik Srinivasan, Group Head, financial sector ratings, ICRA. “…The current model of credit supply in both these segments is largely to originate the loan and hold until maturity.”
In the securitisation market, mortgage originators package portfolios and resell them in capital markets as mortgage-backed securities or covered bonds. The securitisation market is dominated by direct assignment and purchase of loan receivables of non-banks, including housing finance companies, by banks.