All financial entities have to deal with asset liability mismatch as their assets are long-term and liabilities short-term. This is even more acute for banks and housing finance companies (HFCs) that offer home loans. Here, typical loans could be up to 30 years whereas liabilities are for 5 years. The liabilities for banks come via deposits which are more stable whereas HFCs rely on borrowings from banks and issue bonds that are less stable.

This is where securitisation comes in, which can help banks and HFCs (originators of loans) address this challenge. The originators either create or sell the loans to a special purpose vehicle (SPV). These loans are polled based on risks and returns and sold to investors as securities -- also called pass through certificates or PTCs. There are other parties such as credit rating agencies, credit enhancers and so on which help in the overall process of securitisation.

One can immediately see that HFCs gain from securitisation as it helps them lighten their loan books and manage asset liability better. In turn, HFCs give more home loans enabling people to buy their own homes.

In fact, it is the very premise of promoting home ownership which led the US government1  to allow large scale securitisation. The home ownership, which lagged at 64 percent level in 1980s, did improve to 69 percent by the early 2000s. However, post-2008 crisis, the home-ownership has not just declined but had become even lower than 1980’s by 2016. The levels have recovered marginally after 2016.

....

• 1. India already has a securitisation market due to RBI guidelines in 2006 and 2012. The norms allowed two types of securitisation models. The first is direct assignment (DA), which is like a bilateral relationship-based transaction where originators and investors negotiate and process the entire transaction.

  It is not really securitisation which is usually understood as originators and investors working on an arm’s length basis as explained above. This relationship is present in the second model of PTC.

  The securitisation market has increased 10-fold during 2006-19 and is currently at Rs 2.6 lakh crore. However, DA comprises nearly 75 percent of the overall market and 90 percent when it comes to home loans securitisation market.