India's slow but steady moves towards an effective securitization market, in particular the development of mortgage-backed securitization, was confirmed recently by two significant regulatory changes.
First, the state budget in March set out changes to the cumbersome foreclosure laws, which have been one of the major factors impeding MBS issuance. Currently, according to Ananda Bhoumik, of Duff & Phelps Credit Rating Co. in Mumbai, taking possession of a property from a defaulted borrower can take up to ten years. Obviously, this makes it difficult for securitizations to gain any benefit from the underlying value of a property, making residential MBS tricky.
When the budgetary changes are implemented, Indian securitization experts said, properties on which a borrower has defaulted on mortgage payments for more than 12 months will immediately revert to the housing finance company.
"This should go a long way to making mortgage-backed deals feasible," said a banker in New Delhi. However, he warned that it was too early to say whether the law will be effectively enforced. "We will need to see what happens when the first few attempted repossessions come before the courts, but it is certainly a step in the right direction."
The proposals follow a concerted lobbying effort from the property industry, securitization pros and the central bank, all of which have been calling for changes for some time (ASRI 7/12/1999 p.3).
The other recent regulatory change was a decision from the Securities and Exchange Board of India to allow mutual funds to invest in mortgage-backed securities. The securities must have an investment grade credit rating.
The move is intended to increase the available investment base for MBS and is expected to have a profound impact. While some of India's more well-established and conservative investors, such as the Unit Trust of India, have been wary of securitization, newer players are likely to be keen on the potential yield pick-up on offer.
"There has been reluctance from UTI and other institutions, but I think most of the growing mutual funds now are foreign-backed or private sector and they have a lot better understanding of the asset-backed market," Bhoumik said.
Foreign firms such as Merrill Lynch, Prudential and Standard Life have recently been making significant in-roads in the retail mutual fund market and experts suggested that there will be a tug on other more traditional firms to invest in securitized paper if they are outperformed by buyers of asset backeds.
In other Indian securitization news, the launch of the country's first MBS is now scheduled for June. Domestic firms SBI Capital Markets and ICICI are arranging the deal for the National Housing Bank. It is backed by assets originated by Housing Development Finance corporations and should get a domestic rating of AAA from Crisil. The deal is likely to be worth about Rs700 million ($16 million). The market will not be holding its breath, however, as the transaction has been delayed several times. Most recently, it was set to launch in March (ASRI 1/17/2000 p.2).
If the initial deal is a success, it will be followed by several others backed by assets originated by HDFCs. Dewan Housing Finance, for instance, has lined up a deal worth between Rs500 million and Rs600 million, which is likely to be rated by DCR.