India's Mortgage-Backed Securities: A Prudent Evolution in Housing Finance
India recently crossed a significant financial milestone. The country witnessed the launch and public listing of its first Mortgage-backed Pass-Through Certificates (PTCs) on the National Stock Exchange in May 2025. Issued by LIC Housing Finance and structured by RMBS Development Company Ltd, this transaction represents a modest but meaningful step forward.
For the first time, Indian home loans transformed into transparent, exchange-listed instruments with proper market price discovery. This development marks a small but important widening of the path for housing finance in a system traditionally dominated by bank balance sheets.
The Scale of India's Housing Finance Market
Outstanding housing loans in India now exceed ₹30 trillion. This substantial amount comprises approximately one-fifth of total non-food bank credit. The sector has demonstrated steady growth of 12-14% annually over the past decade.
This growth stems from genuine factors like urbanization, household formation, and rising formal incomes rather than speculative excess. Asset quality remains robust, with home-loan delinquencies typically staying well below 2% even during periods of economic stress.
However, a striking funding mismatch exists. Over 85% of housing credit remains on the balance sheets of banks and housing finance companies. These institutions fund these loans primarily through deposits and wholesale borrowings.
Securitization currently plays only a marginal role in this ecosystem. Total annual securitization volumes across all assets range between ₹1.5-2.5 trillion. Residential mortgages account for just 15-25% of this flow. In stock terms, securitized housing loans represent only a low single-digit share of outstanding credit.
Why This Debut Differs from Global Models
The RMBS listing should not be mistaken for a dramatic policy shift. It does not signal a wholesale embrace of securitization-led housing finance. Nor does it mirror the United States model where mortgage bonds dominate funding.
Instead, this development reflects India's instinct for incrementalism. The country is strengthening its financial system step by step. Authorities are testing investor appetite and expanding cautiously without undermining stability.
Regulation plays a central role in this cautious approach. India has deliberately constrained the originate-to-distribute model that underpins large securitization markets elsewhere. Lenders must hold housing loans for a minimum period before securitizing them.
Furthermore, lenders must retain a slice of the credit risk even after selling securities. For residential mortgage-backed securities, minimum risk retention typically stands around 5%. These rules ensure lenders maintain 'skin in the game,' aligning incentives and discouraging careless underwriting.
Learning from Global Experiences
The contrast with the United States market proves instructive. In the US, housing finance migrated decades ago from banks to capital markets. This transition received support from government-sponsored enterprises and standardized government-backed mortgage securities.
That system delivered deep liquidity and long-term fixed-rate mortgages. It allowed the Federal Reserve to influence housing directly by purchasing mortgage bonds during crises. However, it also sowed the seeds of a massive financial crisis.
When underwriting standards eroded, the originate-to-distribute machine amplified risk across the entire financial system. This culminated in the 2008 financial crisis. Cheap credit came at the cost of systemic fragility.
Indian policymakers have drawn clear lessons from that experience. Neither the government nor the Reserve Bank of India has shown appetite for large-scale government guarantees. They have not pursued turning housing credit into a heavily traded asset class.
The emphasis instead focuses on resilience through conservative underwriting, balance-sheet accountability, and gradual market development.
The Balanced Path Forward
A deeper mortgage-backed securities market could potentially recycle bank capital faster. It might draw in long-term savings and potentially lower mortgage rates. There is also a macroeconomic argument to consider.
As housing finance grows larger, its interaction with monetary policy becomes more important. In bank-dominated systems, policy transmission depends heavily on deposit conditions and bank balance-sheet health.
A modest, well-regulated MBS market could support India's vast housing needs. It could give the Reserve Bank of India an additional lever during economic downturns. These benefits are real, and over time, they may justify gradual expansion.
However, the costs of haste remain equally real. A large and liquid MBS market could weaken the link between origination and accountability. In an economy where legal enforcement can be slow and income documentation uneven, that separation carries significant risks.
India's relatively stable housing cycles and absence of housing-led financial crises are not accidents. They represent the product of conservative design choices.
A Measured Experiment in Financial Maturity
The RMBS launch should be seen as a measured experiment. It suggests India is ready to deepen its housing finance market as a move toward financial maturity. Executed carefully, such issuances can build confidence, allow standardization, and create a modest investor base.
If rushed, they could engender stability risks. For now, India appears to be striking a sensible balance. The move toward market-based housing finance does not represent a departure from prudence. It signals evolution.
The scale that housing loans have reached, funding pressures ahead, and the need to mobilize resources before constraints become binding all argue in favor of developing an MBS market. Its success should not be judged by how quickly volumes grow.
Success should instead be measured by whether housing finance becomes incrementally more diversified, transparent, and durable. The goal should be achieving these benefits without courting the vulnerabilities that other nations have learned to regret.
