Efforts on to allow PFs into securitised paper

Talks are on between the National Housing Bank, the ministry of finance and the ministry of labour to allow provident funds to invest in securitised paper.

This assumes key importance today when housing finance companies are on the prowl for longer-term loans as they wish to elongate the tenure of home loans beyond 20 years.

The PF industry is seen to be the ideal investor since they are equally desperate to invest in long-term assets that will match long-term retirement benefits.

Today no HFC has been able to raise more than 15 year money from the domestic market. LIC Housing Finance Ltd issued 15-year bonds earlier last year at a coupon rate of seven per cent.

These bonds maturing in 2018, are trading in the secondary market at 6.42-45 per cent.

Industry sources added that NHB is more keen for PFs to be allowed to invest in mortgaged-back securities.

HFCs can offer maximum securitised paper in the market, which has stable cash flows.

If the Indian MBS market is to develop, participation by the Indian retirement benefit industry is required since they have a greater appetite for long-term paper, as is the case overseas.

The investment norms laid down by the government do not permit the PFs to invest in securitised paper including MBS, despite the latter having a high credit rating and security of principle.

Today MBS are trading 40-50 basis points higher than the corporate debt paper issued by the same housing finance entity.

For instance, while HDFC's five-year CD is trading at 5.45-48 per cent, MBS issued by the same HFC of similar maturity period is quoting at 6.10-15 per cent.

Nevertheless, while PFs are allowed to invest in CDs, they are refrained from investing in MBS.

With interest rates having fallen drastically over the last three years, high-yielding investment avenues for PFs have run dry.

At the same time, however, PFs continue to face payouts at an interest rate of 9-9.5 per cent as stipulated by the Centre.

The recent decision of the government to pay the Rs 8,000-crore (Rs 80 billion) interest on the special deposit scheme -- unlike in the past five years, when the same was reinvested back into the scheme at high interest rates -- has further added to the woes of the industry.