Professional Risk Opinion

Securitisation & Secondary Mortgage Securitisation & Secondary Mortgage marketmarketBy Rajesh MokashiBy Rajesh MokashiDeputy Managing Director, CAREDeputy Managing Director, CARE

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Source: Presentation by HDFC Ltd.

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Source : CARE Ratings estimates

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Source : CARE Ratings estimates

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Source : CARE Ratings estimates

Challenges to Housing finance Long tenor of financing 15-20 years Typical Bond /Loan funding of 5-7 years

leads to ALM mismatch requiring dependence on refinancing.

Restricted appetite of Banks considering dependence on short term deposits

Limted set of Investors particularly Life insurance companies.

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Source : CARE Ratings estimates

Source : CARE Ratings estimates

Source : CARE Ratings estimates

97% of others, or 15% of total comprises of new asset class in securitization – Secured SME Loans (Secured by property mortgage)

Source : CARE Ratings estimates

Major Securitization Drivers in India

Funding source.

Originators who can consistently originate good

quality loans but face capital constraints to growth.

Back to back funding

Meeting investor appetite of different investors such

as Life Insurance Co’s , PF’s and Mutual funds.

Achieving exposure to specific assets

Banks are extensively used this tool as investors to

fulfill their priority sector lending target

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Performance of ABS and MBS pools

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Strong performance

 Pools FY09 FY10

Pools Outstanding 400 395

Default 0 3Includes data of all rating agencies.* Source: publicly available data

Why Securitization in Indian markets remains strong

Strong Originators

Predominantly prime obligors

Lower LTVs

Simplicity of structure

April 10, 2023

Investor Preferences Higher yield at least 50-100 bps above

similar rated bond

Monthly cash-flow structure

Priority sector requirements

Robust performance- Negligible default rate in India

Increased interaction with rating agency

April 10, 2023

Role of Credit Rating Agency

Robust rating framework Identification of Risk Estimation of expected loss Stress testing

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Impediments to Securitisation Rising interest rates Lack of proper interest rate benchmark Restricted investors- Need to permit pension

funds to invest High stamp duty and varying across many

states Lack of standard documentation Investor preference only for AAA paper

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Covered Bonds Post financial crisis there has been a

renewed interest in covered bonds for mortgage financing.

Are obligations of the issuers backed by a cover pool of mortgages as also an overcollateral.

Idea is to create a special right on assets in the cover pool

Ratings often several notches higher than originator.

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Conclusions

Secondary mortgage market critical to give impetus for housing finance

New investors to be allowed in the securitisation market.

Standard documentation Standard benchmarks New instruments such as covered bonds

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THANK YOU

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