NHB's intermediation to help issue covered bonds

Last Updated: Mon, Dec 03, 2012 04:11 hrs

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

Under the proposed arrangement, NHB, instead of a special purpose vehicle, will 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 covered bonds, the assets remain on the issuer’s consolidated balance sheet.

NHB does not guarantee a repayment out of its own funds. Nor does this role create an obligation on NHB’s corporate or financial resources. India Ratings said there was a 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. Liquid assets like cash, certificates of deposit or units of liquid mutual funds are not part of the cover pool. This could exacerbate the risk of liquidity gaps between the cover pool and covered bonds, India Ratings said.

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