India's First RMBS Listing Signals Cautious Evolution in Housing Finance Market

India has marked a significant milestone in its financial markets with the launch of its first residential mortgage-backed securities (RMBS) listing. While modest in size, this development represents a meaningful step toward diversifying housing finance funding mechanisms beyond traditional bank balance sheets, introducing transparent, exchange-listed instruments with market price discovery for Indian home loans.

Housing Finance Market Scale and Growth

The foundation for India's mortgage-backed securities market rests on the substantial scale and quality of the country's housing finance sector. Key metrics highlight the market's robust fundamentals:

This growth has been driven by urbanization, household formation, and rising formal incomes rather than speculative activities. The asset quality has remained consistently robust, with home loan delinquencies typically staying well below 2.00% even during periods of financial stress.

Current Funding Structure and Market Gap

Despite the sector's impressive scale, India's housing finance market exhibits a notably narrow funding structure. Over 85% of housing credit remains concentrated on the balance sheets of banks and housing finance companies, financed primarily through deposits and wholesale borrowings.

Securitization currently plays only a marginal role in the funding mix:

This concentration creates a growing mismatch where long-dated, low-risk housing assets are funded through shorter-term, increasingly competitive liabilities.

Regulatory Framework and Risk Management

India's approach to mortgage-backed securities reflects a deliberate emphasis on stability and risk management. The regulatory framework includes several key safeguards that distinguish it from international models:

• Minimum holding periods before lenders can securitize housing loans
• Risk retention requirements of approximately 5% for residential mortgage-backed securities
• Originate-to-distribute constraints that ensure lenders maintain accountability

These measures ensure that lenders retain "skin in the game," aligning incentives and discouraging careless underwriting practices. While these safeguards make securitization less lucrative as a volume-driven business, they prioritize financial system stability.

Learning from International Experience

India's cautious approach draws clear lessons from the US housing finance experience. The US market migrated decades ago from banks to capital markets, supported by government-sponsored enterprises and standardized mortgage securities. While this system delivered deep liquidity and long-term fixed-rate mortgages, it also contributed to the 2008 financial crisis when underwriting standards deteriorated.

Indian policymakers have shown no appetite for large-scale government guarantees or heavily traded housing credit markets. The emphasis remains on resilience through conservative underwriting, balance-sheet accountability, and gradual market development.

Market Development Outlook

The RMBS launch represents a measured experiment rather than a dramatic policy shift. A deeper mortgage-backed securities market could potentially:

• Enable faster recycling of bank capital
• Attract long-term savings into housing finance
• Provide additional monetary policy transmission mechanisms
• Support India's expanding housing needs

However, the approach prioritizes careful execution over rapid volume growth. Success will be measured by whether housing finance becomes incrementally more diversified, transparent, and durable without introducing the vulnerabilities experienced in other markets. The initiative signals India's financial market evolution while maintaining its characteristic emphasis on prudential regulation and systemic stability.