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Part - V

Mortgage Backed Securities (MBS, RMBS, CMBS)

As we discussed above, MBS constitutes about 76% of the securitized debt market in the US. In contrast, the MBS market in India is nascent - National Housing Bank (NHB), in partnership with HDFC and LIC Housing Finance, issued India’s first MBS issuance in August 2000 *.

The potential of MBS in India, however, is huge. With NHB actively looking towards the development of a Secondary Mortgage Market (SMM) in the country [2], the MBS market in India could soon overtake the other securitization transactions in the country. An MBS market can help small HFCs with good origination capabilities and limited balance sheet strength in staying profitable and concentrate on the housing loan origination. The most important roadblocks for MBS in India are lack of mortgage foreclosure norms and the high incidence of stamp duty for assignment of mortgage necessary for securitization.

Collateralized Debt Obligations (CDO, CLO, CBO)

In this era of bank consolidations, CDOs can help banks to proactively manage their portfolio. CDOs can also help banks in restructuring their stressed assets. ICICI made an aborted attempt to do a CBO issuance in August 2000. The CDO market in India is, however, likely to grow slowly owing to its complexities. The taxation and accounting treatment for CDOs needs to be clarified.

Asset Backed Commercial Paper (ABCP)

Asset Backed Commercial Paper (ABCP) is usually issued by Special Purpose Entities (ABCP Conduits) set up and administered by banks to raise cheaper finances for their clients **. ABCP conduits are usually ongoing concerns with new CP issuances taking out the previous ones. Apart from legal requirements, an active ABCP market requires a large number of investors who understand the instrument and have appetite. India’s securitization market may not be mature currently for instruments like ABCPs.

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* The deal size was Rs. 10.35 billion comprising 11,106 individual housing loans HDFC and LIC Housing finance Ltd.
** An ABCP conduit issues commercial paper to finance the purchase of assets ranging from credit card, auto and trade receivables to CBO and CLOs.

Written by V. Sridhar, PGP 2002, IIM Calcutta.
Contributed by Varun Goenka, Diploma in Business Finance Economics, ICFAI.