'NHB must facilitate issue of covered bonds'

Last Updated: Sat, Dec 01, 2012 18:41 hrs

Indian Ratings has said a clear role for the National Housing Bank in monitoring and ensuring repayments to investors of covered bonds will help mortgage financiers, including the housing finance companies, to quickly issue these instruments in India.

Under the proposed arrangement, NHB, instead of a special purpose vehicle, would act as the cover pool monitor. The housing finance regulator will also be able to appoint back-up servicers in the event of the issuer’s bankruptcy (default by issuer).

Covered bonds are debt securities backed by cash flows from mortgages. They are similar to asset-backed securities created in securitisation, but in here assets remain on the issuer’s consolidated balance sheet.

NHB does not guarantee repayment out of its own funds nor this role create obligation on NHB’s corporate or financial resources. India Ratings said there was the risk that investors could see such intermediation for covered bonds as obligations of NHB and assume they have government support. Such a view could be negative for market development and should be nullified.

The draft regulation (on covered bonds) prefers a pragmatic contractual form instead of creating a separate legislative framework for covered-bonds in India.

The liquid assets like cash, certificate of deposits or units of liquid mutual funds are not part of cover pool. This could exacerbate the risk of liquidity gaps between the cover pool and covered-bonds, India Ratings said.

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