The Hindu Business Line : Leveraging home loans

THE DECISION OF the National Housing Bank (NHB) to make market in mortgaged-backed securities by offering two-way quotes in such instruments besides extending the facility of guaranteeing their repayment is long overdue considering the character of the housing loan market in the country. While the NHB has been assisting housing finance companies, cooperatives and, to a limited extent, even banks, the size and scale of aid has been constrained by the size of its own funds. Thus, its refinance assistance just about totalled Rs 3,000 crore in 2002-03 (the latest year for which the data is available) which is less than a tenth of the aggregate disbursements by commercial banks, housing finance companies and cooperatives during that year. The NHB refinance, such as it is, comes at a price thus rendering this window that much less attractive for the on-lending institutions.

Clearly, housing finance institutions need to create a fresh pool of funds by aggregating their loan assets into appropriate mortgage-backed securities for investment by retail investors. While housing finance companies and, to a limited extent, banks have been pooling their home loan accounts into mortgage-backed securities for subscription by investors, this activity has not only been sporadic but also remains only a fraction of the portfolio of outstanding home loan assets of these institutions. To compound matters, the investment interest is confined to a handful of institutions which look upon such instruments as an incidental dimension to their own direct lending for housing and, hence, end up holding on to them till maturity. The consequent absence of any vibrancy and depth of trading is clearly a deterrent to participation by retail investors or mutual funds with a strong retail investor base. The NHB's proposal to extend guarantees to investors in such securities and as a further measure of comfort, offer to make market in them by offering two-way quotes should help catalyse the development of an active secondary market in these instruments.

A huge pool of household savings is waiting to be tapped, directly or indirectly, through mutual funds, for investment in these instruments. According to the latest figures of financial savings released by the Reserve Bank of India, in 2003-04, households diverted a higher proportion, upwards of Rs 10,000 crore, of their savings into bank deposits over the previous year. There is no reason why the investing public should not look to mortgage-backed securities guaranteed by a centrally-sponsored institution if satisfactory arrangement for liquidity can be ensured. No doubt, an active secondary market reduces the cost of housing loans. But in the ultimate analysis, the existence of such a market is only one of the many policy pre-requisites for giving a real boost to the construction of houses. The archaic laws on land ownership, registration of title, etc., need to be reviewed and the huge transaction costs in house construction substantially reduced if the goal of housing for the masses is to be achieved.

More Stories on : Editorial | Housing Finance

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Leveraging home loans

The first 100 days

The TDS screw gets tightened

Invalidity in focus

The spirit of promissory estoppel

A swim in the troubled waters of a hotel pool to fish for missing reason

Give savings a break

It costs 32 p.c. of GDP for government to mess up economy

Sticklish issues