Creating a market for mortage backed securities in India - prospects and challenges

Abstract

India is witnessing a boom in the real estate sector and there is acute shortage of finance both for residential and commercial sector. One of the major reasons for the tremendous growth of housing finance in developed markets is the systematic development of a market mechanism. The secondary market provides liquidity to the lenders and moderates the cyclical flow of the capital in the real estate market. A vibrant and efficient secondary market also brings down the cost of funding for the originator and provides for a better functioning Mortgage system as a whole. Though the first widely reported securitization deal in India occurred in 1990 when auto loans were secured by Citibank and sold to the GIC mutual fund. However, even now the securitized product market in general and Mortgage Backed securities markets in particular is at a nascent stage of growth in India. Today mortgage market is well developed in what we call developed economies. They however, hold a very different proposition when it comes to developing countries. Graph 1 depicts the situation prevailing in the countries at different stage of economic development. These instruments find The Mortgage to GDP ratio in USA for the year 2001 was at 54% in comparison to the 57% in UK, 40% in EU, 7 % in China and 2.5% in India. Though the scenario has improved considerably with the figure improving to 6.9% in 2004, nevertheless it is nowhere close to that of developed countries.6.9% in 2004, nevertheless it is nowhere close to that of developed countries.6.9% in 2004, nevertheless it is nowhere close to that of developed countries. The securitisation volumes in India have been scaling new peaks every year. Nevertheless, the growth is nowhere near to satisfy the requirements estimated even with the most conservative of estimates. There are multiple reasons attributed to this some of which include lack of regulation, non-clarity of laws concerning securitization, lack of understanding of the benefits of securitization and absence of market-making institutions. Through this paper, we seek to understand securitization as a process, its possible benefits to the Indian Housing sector, the current regulations and policies detrimental to its growth and possible measures which can be undertaken to promote Mortgage Backed securities in India. We also analyze the U.S. MBS market, since it is the most developed MBS market in the world, in order to identify the salient features leading to its growth. In the end we present our conclusions summarizing the observations of the report and chartering the short term and long term areas of action, wherein some improvement can be made, so as to give an impetus to the nascent MBS market in India.