RBI Report Recommends New Intermediary To Set Standards In Housing Finance Securitisation

A great many issues are behind the current crisis that has become a prominent feature of India’s banking system. According to the Reserve Bank of India’s panel on the development of housing finance securitisation, lenders suffer due to the mismatch in the maturity period of various home loans, among other issues.

The panel, which submitted its report in September this year, provided some recommendations on the possible solutions to this issue.

Relaxation in stamp duty: Unlike immovable assets, mortgage-based transactions can be exempted from paying stamp duty. Registration of these loans, too, can be exempted.  

Creation of separate guidelines: The panel recommended that the regulatory treatment should be different for mortgage securitisation and asset securitisation. The minimum holding period (MHP) and minimum retention requirement (MRR) should be relaxed.

 Establishment of intermediary: To capture the market and set standards, an intermediary is required. The panel recommends that this intermediary should be setup through the National Housing Bank (NHB).

 Setting up of a standard process: The entire process of loan disbursement must be standardised. Similarly, standard processes must be introduced for data collection and aggregation of such data.

 Bankruptcy issues: To encourage firms to participate in the securitisation, there has to be considerable benefit that’s visible to them. For example, as of now, if an HFC becomes insolvent, the securitised pool of asset is not considered as an asset of the originator during the liquidation. However, the panel notes that to make investors participate, this should be done away with.

What is securitisation?

There are two kinds of transactions, direct assignment (DA) and pass through certifcates (PTC). Both types involve pooling loans and selling it to a third-party. In doing so, the HFC transfers the credit risk.

In PTC, pooled loans are sold to a third-party through an intermediary. The PTC route is, however, less favoured and forms only a quarter of total transactions. The DA route unfortunately has very little standardisation and keeps details of transactions, that is – prepayment, valuation and other domains in the private domain. It also prohibits mutual funds, insurance and pension funds from participating. Another area of concern that the Committee observed is the cost arising from the various legal and regulatory formalities.