India to have guidelines for non-banking housing finance companies

The National Housing Bank (NHB) will soon come out with guidelines for non-banking housing finance companies to give impetus to funding for housing sector and create an asset-backed securitisation thereby further expanding the securitisation domain, R.V. Verma, chairman, NHB said at an event held in New Delhi today.

Non-banking finance companies (NBFCs) are riskier than banking finance companies as they are not subjected to the same level of scrutiny and oversight, but they are also easier to set up and cheaper to run. Most of India’s gold loans, for example, are handled by non-banking companies such as Manappuram Finance.

India currently has a handful of non-banking housing finance companies, such as LIC Housing Finance, but the guidelines are expected to help give a fillip to growth in the sector.

More NBHFCs will help both investors who want to invest in the real estate sector as well as those who want to take a housing loan to buy a house. The real estate sector in India has seen a big boom in recent years with the inflow of large sums of money, both accounted for and unaccounted for. Prices in the sector has gone up by more than ten times in as many years in most places in India.

“Investments in the housing sector account for a meagre seven per cent of the country’s gross domestic product (GDP), which is woefully low and inadequate more so as the sector is second largest employer after agriculture,” said Mr Verma while addressing a national conference on ‘Securitisation: The Emerging Funding Vehicle” organised by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

“We have to find ways to bring more liquidity into the capital deficient housing sector through market oriented measures and all thisis satisfied by securitisation,” said Mr Verma. “Introduction of Basel III would bring in severe liquidity crunch and the banking sector would require huge amounts of capital inclusion and at the same time growth will continue to be more predominant, securitisation is thus a very imminent mechanism on both these fronts.”

The NHB chairman further said that securitisation would result in capital conservation, capital relief and optimum utilisation of capital through off-balance sheet transactions.

“Besides, the lending sector cannot lend beyond a certain point due to capital constraints and with securitisation they would be enabled to continue to lend and can come over all constraints if they are able to securitise,” said Mr Verma.

Mr Verma further said that India has a great opportunity to re-introduce and kick-start the securitisation process which became a crisis due to irresponsible lending triggered by players involved in market development who apparently got together to exploit the opacity in the underlying process and fee-based income for all the institutions and hampered the growth of securitisation across the globe.

Verma further said that the process of securitisation is driven by growth of primary lending market along with investors’ appetite for the investment papers.

“Looking at the securitisation process from the housing sector’s perspective it is driven by need-driven funding, need-driven liquidity, need driven capital inflows and all this resulting in greater transparency, stability and sustainability and for this each player is required to be aware of his role,” said Mr Verma. “We are also looking at securitising standard portfolios assets which are well known in the industry but the awareness about these assets is underlined and must be promoted amid the investor community.”

Mr Verma also said that NHB is looking to mobilise funds from institutional investors to channelize long-term funds in the mortgage market for a better match of assets and liabilities which would be another benefit they seek to offer to the industry.

“Benefit of securitisation cannot be undermined in India’s perspective, however, the need of the hour is to make an effort to develop orderly and healthy securitisation and ensuring greater alignment of market in the interest of investors,” said Mr Choudhary in his inaugural address.