• Sun. Feb 25th, 2024

    RMBS Development Company Limited (RDCL) Set to Revolutionize the Mortgage-backed Securities Market

    ByJames Forsyth

    Feb 10, 2024
    RMBS Development Company Limited (RDCL) Set to Revolutionize the Mortgage-backed Securities Market

    In a groundbreaking announcement, the establishment of RMBS Development Company Limited (RDCL) promises to breathe new life into the residential mortgage-backed securities (RMBS) market. This move is expected to have a significant impact on the pass-through certificate (PTC) market, which has lagged behind other major asset classes such as vehicle and microfinance loans.

    According to ICRA, the share of RMBS in the overall market is projected to be less than 15% of the Rs. 1 trillion market in FY2024. This highlights the untapped potential of the RMBS market and the need for its development to support housing finance companies in meeting the country’s housing needs.

    The Reserve Bank of India’s revised securitization guidelines in September 2021 have already provided some relief to RMBS issuers by reducing the minimum holding period and retention amounts. These measures have resulted in improved volumes, with RMBS reaching approximately Rs 10,000 crore in 9M FY2024 as compared to Rs 6,000 crore in FY2023. However, there is still more work to be done to fully unlock the market’s potential.

    The formation of RDCL is expected to address some of the key concerns that have kept investors at bay, such as long tenures, prepayment risks, interest rate risks, and the absence of a secondary market. By providing a dedicated entity focused on RMBS, RDCL aims to instill confidence in investors and stimulate growth in the mortgage-backed securities market.

    RDCL will be involved in various activities, including investing in RMBS, facilitating investment, issuance, and trade of RMBS, offering credit enhancements for RMBS transactions, and providing liquidity support in the secondary market. Esteemed financial sector entities like HDFC Bank Limited, ICICI Bank Limited, and Bajaj Finance Limited will participate as minority shareholders, bringing their expertise and resources to the table.

    While the finer details of RDCL’s business plans and evaluation metrics for RMBS are still awaited, the entity is expected to be incorporated before March 2024 with a substantial net worth of Rs 500 crore. This development marks a significant milestone in the growth of the mortgage-backed securities market and holds great promise for the future of housing finance in the country.

    In a groundbreaking announcement, the establishment of RMBS Development Company Limited (RDCL) promises to breathe new life into the residential mortgage-backed securities (RMBS) market. RDCL aims to address key concerns that have kept investors away from the RMBS market and stimulate its growth.

    ICRA projects that the share of RMBS in the overall market will be less than 15% of the Rs. 1 trillion market in FY2024, indicating untapped potential for the RMBS market. The development of RMBS is crucial for supporting housing finance companies in meeting the country’s housing needs.

    The Reserve Bank of India’s revised securitization guidelines in September 2021 have already provided relief to RMBS issuers by reducing the minimum holding period and retention amounts. This has resulted in improved volumes, with RMBS reaching approximately Rs 10,000 crore in 9M FY2024 compared to Rs 6,000 crore in FY2023. However, more work is needed to fully unlock the market’s potential.

    RDCL will be involved in various activities, including investing in RMBS, facilitating investment and trade of RMBS, offering credit enhancements for RMBS transactions, and providing liquidity support in the secondary market. Esteemed financial sector entities like HDFC Bank Limited, ICICI Bank Limited, and Bajaj Finance Limited will participate as minority shareholders.

    While the finer details of RDCL’s business plans and evaluation metrics for RMBS are still awaited, the entity is expected to be incorporated before March 2024 with a substantial net worth of Rs 500 crore. This marks a significant milestone in the growth of the mortgage-backed securities market and holds great promise for the future of housing finance in the country.

    Key Terms:
    1. Residential Mortgage-Backed Securities (RMBS) – Securities that are backed by mortgages on residential properties. They provide investors with a share in the cash flows generated by the mortgage payments.
    2. Pass-Through Certificate (PTC) – A type of security that represents the beneficial interest in a pool of mortgages or other similar assets. The income generated from the underlying assets is “passed through” to the certificate holders.
    3. Securitization – The process of converting illiquid assets into marketable securities to facilitate their trade and investment.
    4. Secondary Market – The market where previously issued securities are bought and sold by investors, rather than directly from the issuer.

    Related Links:
    ICRA
    Reserve Bank of India
    HDFC Bank Limited
    ICICI Bank Limited
    Bajaj Finance Limited