RBI Report Suggests New Standards in Housing Finance Securitization
Nov 05, 2019 Real Estate News
One can point out many issues that are the reason for the current crisis in the Indian Banking system. According to the panel of Reserve Bank of India, the lenders suffer heavily due to the mismatch in the maturity period of various home loans among other issues.
The panel submitted their report in September this year and has suggested some solutions to the issues that the banking industry is facing.
Relaxation in the stamp duty: the immovable properties, the mortgage-based transactions can be exempted from the stamp duty charges. The banks can exempt the registration of such loans as well.
Separate guidelines:
to the report submitted by the panel, there should be a separate regulatory treatment for mortgage securitization and asset securitization. The minimum holding period (MHP) and minimum retention requirement (MRR) should be relaxed.
Intermediary:
the intermediary is required to set up the market standards and capture the proper working of the same. The panel suggested that an intermediary should be set up through the National Housing Bank (NHB).
Standard process:
the panel suggests a proper standardization of various applications and their approvals. According to the panel, there should be a standardized loan approval channel. The data collection and the aggregation of such data should also be standardized.
Bankruptcy issues:
encourage the firms to participate in the securitization, there have to be certain benefits that are visible to them. For instance, if a bank becomes insolvent now, the securitization pool of the asset is not considered as an asset of the originator during the liquidity.
Securitization:
The question arises that what is securitization and how do the banks operate it.
For the uninitiated, there are two kinds of transactions: direct assignment (DA) and Pass-through certificates (PTC). Both involve pooling the loans and selling it off to the third party. In doing so, the bank transfers the credit risk.
In the PTC method, the pooled loans are transferred to the third party through an intermediary. The PTC route is less favoured and forms only a quarter of the total transaction. The DA route has very little standardization and keeps the details of the transaction that is, prepayment, valuation and other domains in the private domain. DA route also prohibits the insurance, mutual funds and pension funds from participating.
Another area that the panel witnessed that needs reformation is the cost arising from the legal and regulatory formalities.
The panel submitted their report in September this year and has suggested some solutions to the issues that the banking industry is facing.
Relaxation in the stamp duty: the immovable properties, the mortgage-based transactions can be exempted from the stamp duty charges. The banks can exempt the registration of such loans as well.
Separate guidelines:
to the report submitted by the panel, there should be a separate regulatory treatment for mortgage securitization and asset securitization. The minimum holding period (MHP) and minimum retention requirement (MRR) should be relaxed.
Intermediary:
the intermediary is required to set up the market standards and capture the proper working of the same. The panel suggested that an intermediary should be set up through the National Housing Bank (NHB).
Standard process:
the panel suggests a proper standardization of various applications and their approvals. According to the panel, there should be a standardized loan approval channel. The data collection and the aggregation of such data should also be standardized.
Bankruptcy issues:
encourage the firms to participate in the securitization, there have to be certain benefits that are visible to them. For instance, if a bank becomes insolvent now, the securitization pool of the asset is not considered as an asset of the originator during the liquidity.
Securitization:
The question arises that what is securitization and how do the banks operate it.
For the uninitiated, there are two kinds of transactions: direct assignment (DA) and Pass-through certificates (PTC). Both involve pooling the loans and selling it off to the third party. In doing so, the bank transfers the credit risk.
In the PTC method, the pooled loans are transferred to the third party through an intermediary. The PTC route is less favoured and forms only a quarter of the total transaction. The DA route has very little standardization and keeps the details of the transaction that is, prepayment, valuation and other domains in the private domain. DA route also prohibits the insurance, mutual funds and pension funds from participating.
Another area that the panel witnessed that needs reformation is the cost arising from the legal and regulatory formalities.
