The National Housing Bank, India's governing body for housing finance, is preparing another foray into the mortgage-backed securitization market, following a successful pilot issue in August (ASRI 9/10/2000 p.10).

The latest transaction, scheduled to happen at the start of 2001, will also be a test rather than a full-scale deal, but at Rs1.5 billion (U.S.$30 million) will be bigger than the original Rs1 billion issue.

Although it has tested the water already, NHB does not feel that the time is right for a full-scale deal just yet. "We will have a series of pilot issues of different housing finance companies, we don't feel ready for a full issue because it's a long learning curve," explained a senior official at the bank. "We did a pilot issue in August and we're hoping to test the waters in January or February at the latest next year. We're confident that we should have the second MBS in the market by then."

Understandably for a country in the embryonic stages of securitization, NHB is cautious about hitting the market with a big deal, and will wait for the optimum market conditions before it does so. "We expect we'll need three or four issues before we're ready," the official said. "For a very large issue to come forth we will need to pick on the mortgages that have been originated very recently, so the seasoning period will be far less than what we are testing now. We could have mortgages with maximum seasoning of 12 months for a big transaction."

"Also, interest rates will be an important factor on the underlying loans," the official continued. "They have to be high enough to cover all the coupon payments to the investors as well as the transaction costs, plus all the risks involved. We also need the rating agencies to be satisfied so as to obtain a good rating for the instrument, so it will take some time before we get on with that size of deal."

Trying to satisfy all the necessary interested groups in India takes some time and the background to NHB's own activities in the market has been a lengthy one. "We have had a very long period of looking into securitization, covering between three to four years," the official said. "We've listened to input from various quarters like the legal bodies, taxation and accounting experts, housing finance companies, the investor community and the rating agencies. We've had the combined input of all these and tried to get a consensus on the benefits of securitization, mainly to satisfy the concerns of government agencies."

The official thought the benefits of MBS to Indian companies was the same as with any other country. "The benefits of securitization for India are obvious: firstly liquidity, immediate liquidity up front to the housing companies so that they can go and expand their business," he opinioned. "It also provides them with capital relief so their return on assets improves, their return on equity improves as does their capital adequacy. And of course it makes the balance sheet look so much better."

In the official's opinion, those benefits have been noticed by the investor community, providing the necessary platform from which the market can grow. "There's a good potential market in India, certainly for mortgage-backed transactions," he said. "Our first transaction was shared amongst a healthy number of categories of investors: the insurance companies, mutual funds, financial institutions and commercial banks."

Although NHB does not foresee the need to target the international investor community just yet, the official did remark that "Eventually yes, our roadmap does see that we will access international capital into the Indian housing market through this particular route."

The first NHB transaction - arranged and underwritten by SBI Capital Markets - had a maturity of seven years and carried a coupon of 11.85%. The deal was rated triple-A by Crisil and was backed by residential mortgages originated by Housing Development Finance Corp. and LIC Housing Finance.

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