Mortgage-backed securities’ rebound rides on stable rates

MUMBAI: Volumes in the residential mortgage-backed securities (RMBS) market have fallen in the last one year, mainly due to a Reserve Bank of India regulation on securities which prevented banks and finance companies from booking profits in the year of sale of these securities.

RMBS sales stood around Rs 5,000 crore in the year ended March 31, 2006. This is expected to rise if the interest rates stabilise, Neeraj Gambhir, head of fixed income and derivatives at ICICI Bank, told Bloomberg.

“In the Indian context, it’s not very easy to hedge the interest-rate risk, so investors are not very comfortable” with bonds maturing in about eight to 10 years. The bank is hopeful of selling more of the securities to investors, Gambhir told Bloomberg. 

Mortgage-backed securities (MBS) are securitised receivables, mostly on home loans, sold to a buyer.

The securities are purchased from banks, housing finance companies and other originators and then assembled into pools by an entity.

“The RBI regulations which came late last year said that banks cannot book all their profits in one year, instead they had to spread the profits till the security matures at the end of the term,” said a senior official from a private securities company.

Earlier, banks were allowed to book profits at one go at the first year of the security.

Dealers said the inability of banks to book profits, which was a major attraction, was a big blow to all in the securitisation market. “The RBI rules also prevented the resetting of credit enhancement associated with securitisation transactions. Banks used to reset their credit enhancement as the tenor of the transactions lapsed and now they are restrained from doing,” said Krishnan Sitaraman, head, financial sector rating, Crisil.

Volumes were also hit due to the rise in the government bond yields as higher yields made the securities market unattractive to borrow from. “Housing finance firms began to borrow directly from the banks instead of borrowing from the securities market as the loans from banks became cheaper compared with securities resulting in lower volumes,” said Ladha.

Besides the drop in volumes, the fall in interest from the market can also be gauged from the drop in borrowings from vehicle finance companies after the RBI regulations.

“Volumes of securitisation for vehicle finance companies came down from 40% of their disbursement in 2004-05 to 15% in 2005-06 after the introduction for these guidelines,” Sitaraman said. The regulations came in late 2005.

The securities market has been hit by the RBI regulations as the profit from capital has reduced but dealers are hopeful that the RBI will come out with some modifications giving some leeway in booking profits.