As liquidity remains tight, housing finance companies (HFCs) are keenly waiting for the RMBS Development Co Ltd (RDCL) to start operations in a major way for accessing long term liquidity with lower funding cost, officials say.
“HFCs are eager for RDCL to become operational because it promises an additional avenue of stable and cost-effective liquidity. By fostering market depth and enhancing investor confidence, RDCL will not only improve the financial resilience of HFCs but also facilitate sustainable growth in India’s housing sector,” said Manish Jaiswal, MD and CEO, Grihum Housing Finance.
Incorporated in March 2024, RDCL is backed by National Housing Bank (NHB) and has lenders including HDFC Bank, ICICI Bank, Aditya Birla Housing Finance, Bajaj Finance, IIFL Housing Finance, Grihum Housing Finance on its cap table, among others. The company is tasked with deepening the residential mortgage-backed securities (RMBS) in the country. However, a year since its incorporation, the company is yet to commence operations in a major way.
“The introduction of RDCL into the RMBS market represents a watershed moment for the housing finance ecosystem. HFCs will be able to pool their mortgage portfolios and convert them into tradable securities thereby tapping into the capital markets,” said Ajay Jaiswal, COO, IIFL Home Finance.
As more mortgages are securitised, more capital flows back into the housing sector, he said. By providing a structured, transparent platform for mortgage-backed securities, RDCL will help lower the cost of funding for HFCs by allowing them to diversify their sources of capital, he said.
What operations can RDCL do
According to Grihum Housing’s CEO, towards the start of operations, RDCL can conduct co-investment operations, wherein it will participate in RMBS issuances to instil confidence among investors and ensure market traction. It can also provide enhancements by acting as a guarantor or providing partial guarantees to improve credit rating of RMBS issuances, particularly aiding lower rated HFCs.
“RDCL can play a vital role in ensuring liquidity by purchasing or facilitating trades in RMBS instruments. This will help create a vibrant secondary market, improve price discovery, and attract more institutional investors,” he said.
“RDCL could also adopt advanced securitisation techniques, aligning with global standards, to ensure transparency, uniformity, and investor trust. By acting as a market stabilizer, RDCL can mirror the success of entities like Ginnie Mae or the European Stability Mechanism, which have bolstered RMBS markets in their respective regions,” he added.
Overall, RDCL can help HFCs in facing challenges related to asset-liability mismatches (ALM), limited access to long-term funding, and exclusion from bond markets for most HFCs rated below AA. By improving the risk profile of securitisation transactions, RDCL will enable HFCs to tap into a wider pool of investors, including insurance companies, pension funds, and international players, who typically hesitate to invest in lower-rated issuers.
According to ICRA Ratings Senior Vice President Abhishek Dafria, the RBI, through its revised securitisation guidelines of September 2021, provided relaxations to the originators issuing the RMBS in terms of lower minimum holding period required for loans being securitised and lower retention amounts to be maintained by the originators.
“While the measures helped improve the RMBS space, with volumes improving to ₹10,000 crore in 9MFY24 against ₹6,000 crore in FY2023, more still needs to be done. The formation of RDCL could help in widening the investor base as they have traditionally been wary of investing in these securities due to its long tenure, prepayment risks, interest rate risks and absence of a secondary market,” he said.
Pointers:
- RDCL could enable long term funding avenue for HFCs, lower funding costs
- Incorporated in March 2024, RDCL is backed by NHB and major banks, HFCs
- RDCL can aid in co-investment, credit enhancement and building secondary market for RMBS
