Liquidity and Funding Issues including Secondary Mortgage gg Facilities Housing Finance in South Asia, Jakarta May 27 29, 2009 R V VERMA NATIONAL HOUSING BANK INDIA
Contents I. Goba Global Developments e e II. III. IV. Trends in the Indian Market Impact on Mortgage Market Sources of Liquidity and Funding NHB s Role V. Scope for MBS VI. Looking Ahead 2
Global Developments 3
Global Developments Global financial markets are witnessing turbulent conditions beginning second half of 2007 Crisis still unfolding both in the financial sector as well as in the real economy Resulting credit and liquidity crisis has led to uncertain market conditions 4
Global Developments Inter bank money market witnessed funding pressure, equity markets weakened and counterparty credit risk increased FIs turned risk averse and faced liquidity and capital erosion problems Losses and high credit risk resulted in scramble for capital Crisis deepened beyond the US and Europe to the emerging g economies 5
Contd./ Global integration giving g way to protectionism, funding & liquidity critical on the back of global recession Central Banks took action independently / coordinated manner to enhance the effectiveness of their intervention including liquidity facilities Successive cuts in the benchmark rates has brought the rates to record low levels: Federal Funds target rate 0 0.25% Bank of England s Bank Rate 0.50% ECB Refinancing rate 1.00% 6
Trends in the Indian Market 7
Trends in the Indian Market EMEs are feeling the impact of the global crisis Tightened liquidity conditions since the second quarter of 2008 09 on the back of global trends and fear of recession Money market witnessed spike in interest rates in late September due to tightened market liquidity MIBOR around 10.50% during this period 8
Impact on Indian Economy Credit market witnessed increase in lending rates Indian equity markets declined in tandem with global trends and major stock indices below threshold levels in Oct 08 Capital flow reversals in Sep 08 and Oct 08 9
Steps taken by the RBI and the Government Govt. announced two major fiscal stimulus packages RBI s monetary measures to maintain liquidity and continued flow of credit to productive sectors CRR reduced 4 times during the month of Oct 08 from 9 % to 5.5% and subsequently to 5% Repo rate brought down from 9% to 4.75%; Reverse Repo rate reduced to 3.25% since Oct 08 10
Steps taken by the RBI and Government (Contd./ ) RBI s liquidity support to banks through lower SLR by 1.5 per cent to meet liquidity for Mutual Funds and NBFCs Additional liquidity through this window estimated at around Rs. 600 billion RBI s Special Refinance Facility of Rs.40 billion to NHB as temporary liquidity support for HFCs Measures taken since mid Sep 08 resulted in improved liquidity condition 11
Impact On Mortgage g Market 12
Indian Mortgage Market Steady growth in mortgage market Proactive Regulation Conservative lending practices; Originate to hold NPAs well contained Measured and calibrated approach of Central Bank HFCs regulated by NHB 13
Recent Trends in the Housing Finance Sector Demand led liquidity and funding of the housing sector Indian housing finance sector witnessed a CAGR of around 30% during 2003 08 0 Housing loans at lower rates coupled with positive market sentiments through 2007 08 resulted in significant demand for housing RBI, since 2004, signaled overheating of specific sectors including real estate sector and tightened the regulations 14
Recent Trends (Contd./ ) Proactive regulations of the RBI, as counter cyclical cyclical measure, also affected liquidity / credit supply However the recent steps taken by the RBI has eased liquidity Housing sector s dependenced on diverse sources for funding and liquidity 15
Sources of Liquidity and Funding 16
Role of NHB Augmenting g Resources for the housing sector Leveraging the liquidity Support specialized institutions Promote linkages between formal and informal sector Financing MFIs Multiple institutions Multiple l products wider coverage 17
Funding Profile NHB Households, Corporations, Trusts, Provident Funds Reserve Bank of India External Sources GOI LIC/GIC/UTI Scheduled Banks National Housing Bank FIs State Apex CHFS Primary CHFS MFIs Housing Finance Companies Households & Corporations LIC : Life Insurance Corporation of India GIC : General Insurance Corporation of India CHFS : Co-operative Housing Finance Societies 18
Liquidity Facility for the Sector NHB s liquidity support to HFCs and Banks Diversified source of funding Aggregate financial assistance by NHB since July 08 is at Rs. 101.0303 billion Cumulative financial assistance is at Rs. 527.54 billion Total housing loans disbursed during FY 2008 09 by major HFCs stood at Rs. 428.82 billion 19
Financing by NHB Economic Reforms Financial Market Affordability National Housing Bank Banks HFCs Financial Sector Real Sector Capital Market Housing Market Public Agencies Private Developers Co-op. Societies Building Materials & Technology 20
Diversified Sources of funding for the Mortgage Sector Borrowing from banks Public Deposits Bonds/Debentures/Other Debt Instruments NHB s refinance Securitisation Future Funding Vehicle 21
Scope for MBS 22
Capital Deficient Sector Growing Primary Market Scope for MBS Shift towards Market based Resource Mobilization Matching Borrowers & Investors needs; Secondary Market Intermediation Creation of a Long term Debt market through introduction of MBS Unique Opportunity for the Housing Finance Sector to reposition in a changing financial environment NHB s key role in the Process 23
Facilitating aiiai MBS NHB Act Amendment in 2000 providing for Securitisation SCR Act, 1956 Amendment IRDA & SEBI Guidelines for investment Guidelines on securitisation of standard assets issued by RBI in February 2006 Foreclosure Laws simplified : SARFAESI Act Stamp duty reduced to 0.1% in 6 States Central Registry for Land and Properties being explored Mortgage g Guarantee/ Insurance being explored will facilitate MBS and stimulate funding 24
MBS Industry Driven by Liquidity Requirement Capital Relief Risk Dispersion Exposure Norms ALM Position Deep & Broad Primary Market 25
Features of MBS Market Prudent lending with transparency Tracking the underlying assets Securitisation to induce greater discipline Promote growth with stability Role of Rating agencies Need for higherh due dl diligence standards d Proactive supervision and surveillance of papers and the underlying cash flows 26
NHB s RMBS Issues Borrowers EMI Loan Mortgages Originator Custodian Escrow A/c Servicing & Paying Agent H F C Guarantee Cash Pool Monthly pay-outs Investors Unrated Pool Rating Agency Rated MBS Payment of Consideration by SPV SPV Custody Agreement Declaration of Trust Trustee Registrar & Transfer Agent Servicing & Paying Agency Agreement N H B Pass- Through Certificates Banks FIs Insurance Cos. Mutual Funds PTCs Issue Arrangers
NHB s RMBS (contd./ ) Conforming Mortgages Standardized Pool Selection criteria Seasoning requirement Consistent performance High Collection efficiencies i i Consistent payments to Investors Servicer Audit SPV Audit Surveillance by Rating Agencies 28
Liquidity through Securitisation INR in billion FY2005 FY2006 FY2007 FY2008 FY2009 ABS 222.9 178.5 234.2 313.2 135.7 MBS 33.4 50.1 16.11 59 5.9 32.9 CDO/LSO # 25.8 21.0 119.0 318.2 351.2 Total 282.1 249.6 369.3 637.3 519.8 #Securitisation of individual corporate loans or loan sell-off Source: ICRA Predominantly Direct ie Assignment deals ABS transactions Simple structures; single tranche; credit enhancement primarily cash collateral 14 NHB RMBS issues till date; Amount ~Rs.8.62 billion involving i 7 lending institutions 29
Secondary Market Institution Bankruptcy Remoteness Arms length, Neutrality, Domain Oversight, Investors Trust Information dissemination Integrated Approach for MBS transactions Role for a dedicated Secondary Mortgage Market Institution to act as Centralized Securitisation Vehicle Need to revive the MBS market with ihlessons learnt 30
Looking Ahead 31
Expansion of Housing Finance Products Credit products (term, rates, amortization) Broader distribution channels Mortgage credit insurance for lenders Micro finance applied to housing Construction, infrastructure and rental finance Instruments to reallocate risk 32
Institutional Support Government Support / Guarantee Liquidity Pricing Targeted at low income housing programmes Risk / Shelter Fund / Guarantee Fund Subsidy support to EWS/LIG housing Leveragee e institutional finance 33
Contd./ Diverse funding sources confidence building critical Wider stake holding viz. Depositors, o Investors, Creditor institutions, FDI, FII etc. Risk Sharing Mechanism synergy in funding/risk sharing based on risk appetite of different agencies Regulatory framework supervision and surveillance inspires confidence among funding agencies 34
Looking Ahead Channelising Long term funds Pension/ Provident & Insurance Funds throughh MBS Mortgage Guarantee as Credit Risk Mitigation for MBS NHB Sponsored specialized Secondary Mortgage g Institution (provisions of NHB Act, 1987) Bring discipline to the market Prudent underwriting standards Standardization in origination Conforming norms for securitisation Incremental liquidity to the mortgage market Access to better matched funding Expanding Housing Finance with Stability 35
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