India Launches First Mortgage-Backed Pass Through Certificates

On 5 May 2025, India marked milestone in its financial sector with the listing of the country’s first Mortgage-Backed Pass Through Certificates (PTCs) on the National Stock Exchange. This initiative, led by Shri M. Nagaraju, Secretary of the Department of Financial Services, marks the growing importance of innovative financial instruments in the housing finance market. The PTCs are structured by RMBS Development Company Limited and are backed by a pool of housing loans from LIC Housing Finance Limited.

Mortgage-Backed Pass Through Certificates

Mortgage-Backed Pass Through Certificates are financial instruments that allow investors to earn returns based on mortgage payments made by borrowers. They are structured to provide liquidity and stability to the housing finance sector. The recent issue involved a total of ₹1,000 crores, comprising 1,00,000 PTCs with a face value of ₹1,00,000 each.

Importance of the Listing Ceremony

The listing ceremony was attended by various heads of banks, housing finance companies, and financial institutions. Shri Nagaraju emphasised the critical role of the housing sector in India’s economic growth. He noted that housing finance has extensive linkages with industries such as construction and infrastructure, which are vital for national development.

Details of the PTC Issue

The PTCs issued carry a coupon rate of 7.26% per annum and have a maturity period of nearly 20 years. They received an AAA(SO) rating from CRISIL and CARE Ratings, indicating a high level of creditworthiness. The PTCs are issued in dematerialised form, making them easily transferable and tradable in the secondary market.

Significance of Securitisation in Housing Finance

Securitisation is a process that transforms illiquid assets into securities. It plays important role in enhancing the liquidity of housing finance markets. Shri Nagaraju brought into light that the integration of the housing finance market with the debt market could stimulate growth. This is particularly important given India’s vast population and the urgent need for affordable housing solutions.

Future Implications for the Housing Sector

The introduction of PTCs is expected to catalyse growth in the housing finance sector. By attracting more investment, it can potentially address the housing needs of millions of people. This initiative puts stress on the government’s commitment to improving access to housing finance, which is essential for overall economic development.

Questions for UPSC:

1. Discuss the impact of innovative financial instruments on the housing finance sector in India.
2. Critically examine the role of securitisation in enhancing liquidity in financial markets.
3. Explain the significance of housing finance in the context of India’s economic growth.
4. What are the challenges faced by the housing sector in India? Discuss with suitable examples.

Answer Hints:

1. Discuss the impact of innovative financial instruments on the housing finance sector in India.

1. Innovative financial instruments like Mortgage-Backed PTCs provide liquidity, attracting more investments into housing finance.
2. They allow for better risk distribution, enhancing the stability of financial markets.
3. Such instruments facilitate access to affordable housing by lowering borrowing costs for financial institutions.
4. They can stimulate growth in related sectors, such as construction and infrastructure, creating job opportunities.
5. The introduction of these instruments indicates a maturing financial market, reflecting investor confidence and regulatory support.

2. Critically examine the role of securitisation in enhancing liquidity in financial markets.

1. Securitisation transforms illiquid assets into marketable securities, increasing the availability of capital in financial markets.
2. It reduces risk for lenders by diversifying the asset pool, thus encouraging lending and investment.
3. Enhances market efficiency by providing investors with a wider range of investment options with varying risk profiles.
4. Promotes financial stability by allowing institutions to manage their balance sheets more effectively.
5. However, it can also lead to systemic risks if not managed properly, as seen in past financial crises.

3. Explain the significance of housing finance in the context of India’s economic growth.

1. Housing finance is crucial for providing affordable housing solutions, directly impacting living standards and social stability.
2. It stimulates economic growth through its linkages with construction, real estate, and allied sectors.
3. Access to housing finance encourages home ownership, encouraging wealth accumulation among citizens.
4. It plays a vital role in urban development and infrastructure growth, essential for a rapidly urbanising population.
5. Government initiatives in housing finance reflect a commitment to inclusive economic development, addressing disparities in access to housing.

4. What are the challenges faced by the housing sector in India? Discuss with suitable examples.

1. High property prices and interest rates make housing unaffordable for portion of the population.
2. Regulatory hurdles and bureaucratic delays hinder timely project completion, affecting supply in the market.
3. Lack of adequate infrastructure in many urban areas limits the development of new housing projects.
4. Inadequate access to housing finance for lower-income groups restricts their ability to purchase homes.
5. Market volatility and economic downturns can lead to reduced investment in housing, impacting overall growth.