With 20% year-on-year growth but a mortgage market still only 6%-7% of GDP, India is exploring ways to boost housing finance. The Covered Bond Report spoke to the chairman of the National Housing Bank, which is responsible for housing finance, about a new covered bond initiative.

NHB has established a working group to look at the potential for covered bonds in India. The group was constituted two months ago, and includes representatives from the housing finance industry, banks, regulators, and the Ministry of Finance.

RV Verma

“We are looking to explore the market for covered bonds and the need for such an instrument in the industry, so we have brought together the institutional representatives to work in the Group to study the feasibility, and make recommendations on what the prospects look like and what the road-map should be,” said RV Verma, chairman and managing director of the National Housing Bank, which is a subsidiary of the Reserve Bank of India responsible for supporting and regulating housing finance. “We may also work out a business model, with the lead role to be played by the National Housing Bank as the apex financial institution in the housing sector.

“We will be taking inputs from different players, including, of course, the government in due course, because of the legislative aspect,” he added. “Also, we are drawing on the international experience of the role played by covered bonds as an alternate instrument to MBS. And then we will see its customisability to the Indian context.”

NHB has previously supported securitisation initiatives and MBS transactions, but the MBS market is subdued, said Verma, particularly in the aftermath of the sub-prime crisis.

“A number of lessons have been learnt,” he said, “and we are exploring how the market can use some variants of securitised instruments, such as covered bonds, and bring lenders/originators to bear greater responsibility, as the investors in covered bonds will have recourse to the balance sheet of the lenders. So there’ll be lot more responsible origination and close supervision and monitoring by the lenders themselves.”

According to Verma, mortgage lending is growing 20%-21% year-on-year, with new lending of around $30bn (INR140bn) annually and outstanding mortgages totalling about $120bn (INR564bn). This is equivalent to around 7%-8% of GDP, which Verma said “needs to be scaled up quite substantially”.

NHB regulates specialist housing finance companies, which were historically the leaders in the housing finance industry. However, they now account for around 30% of origination, with banks – which NHB also has links with – increasing their market share, said Verma, with around 70% of new business origination and a similar proportion of outstanding mortgages.

Although the working group has only recently been set up, Verma said that he envisages the two different classes of lenders being able to use covered bonds, based on the recommendations and findings of the group.

“We have a very specialist constituency in the housing finance companies, so we would look at their prospects more closely than the banks,” he said. “But as an industry product, this is going to be usable by both categories of institutions.

“We are looking at the entire market in a holistic way.”