Based on the above reasoning as to why MBS in India should have a huge potential, we go to make some estimates of the size of the potential market.
Estimate 1 On the basis of 1991 census, the estimated housing shortage in India in year 2001 was 19.40 million units. Of these 12.8 million dwelling units (65.98 per cent) were required in rural areas and 6.6 million dwelling units (34.02 per cent) were required in urban areas16. Even taking a conservative estimate from by the Planning Commission in the Tenth Five Year Plan, the estimated the urban housing shortage was 8.89 million dwelling units in 2002. Further, the total number of houses that would be required cumulatively during the Tenth Plan period is estimated at 22.44 million dwelling units. The average size of housing loan in India is INR 2 lakhs, so the total investment required in housing to provide 22.44 million dwelling units will have to be a staggering INR 4488 billion or INR 448800 crores. On a per year basis this translates into INR 89760 crores. This is much more than the total disbursement made by the financial institutions for house loan, which stood at INR 42,027 crores in 2003. This shows that there is an urgent need to increase the supply of funds to the housing sector so as to bridge the gap, which can be bridged about to some extent by developing a secondary market for mortgage securities.
On having a look at various developed and semi-developed secondary markets across the world, we chose the Malaysia for our estimation, because the figures for the Malaysian market were the most conservative.
As at the end of 2002, CAGAMAS has purchased 15.9% loans17. So, if we use the same percentage for the loans that can be securitized in the Indian market, then as per the disbursals in the primary mortgages market in 2003, the total mortgage securities that could have been issued in secondary mortgages market in 2003 would have been INR 6682.27 crores. If we take into account the funds required in the housing sector, then the mortgage securities that can be issued per year can be INR 14272 crores. This is significantly different from the present status of the Indian secondary mortgages market, where the total MBS issued in 2003 were INR 114.1 crores.
If we assume that the present rate of cumulative average growth rate of 24.42% in disbursals of housing loans (from 2000-2003) to continue till 2010, then in the year 2010 the total amount disbursed under the present scheme of things would be INR 205189 crores. Even if only 15.9% of the amount disbursed is securitized, then the amount corresponding to mortgage securities issued in 2010 would amount be INR 32625 crores. This is really far off from MBS issued in 2002-2003 with a principal outstanding of 141.28 crores.
Estimate 2 If like in US, the two-third of our home loans are securitized, then this would lead to MBS issues of INR 28017.91 crores per annum (based on disbursals figures of 2002-2003). The MBS issues in 2002-2003 were against a principal outstanding of INR 141.28 crores, which is just 0.5% of the above stated possible MBS that can be issued per year.
Estimate 3 Mortgage Securities (including covered bonds in the case of European countries) form a very important part of the overall bond market of many countries. The percentage of mortgage securities to total bond market in selected countries is as follows:
For the purpose of our estimating the size of mortgages market, we will use the most conservative figures. So, we will take the example of Malaysian market.
As on March, 2003, the total outstanding mortgage securities issued by CAGAMAS BERHAD in Malaysia amounted to RM 26.34 billion and the total outstanding government securities were RM 121.85 billion19. So, as on March 2003, the total outstanding mortgage securities were 21.62% of the total outstanding government securities.
Similarly, as on March 2002 the total outstanding mortgage securities issued by CAGAMAS BERHAD in Malaysia amounted to RM 24.68 billion and the total outstanding government securities were RM 106.55 billion20. So, as on March 2002, the total outstanding mortgage securities were 23.17% of the total outstanding government securities.
So, for the purpose of estimating the potential of mortgage securities in India, we will use the most conservative estimate of 21.62% for the percentage of mortgage securities with respect to government securities in Malaysia.
Now, if we look at the Indian debt market, the total outstanding government debt in India as on March 2003 was INR 807292.6 crores, which increased from 640650.6 crores on March 200221. So, in 2002-2003 net government debt of INR 166642 crores was issued.
If we take the Malaysian example and estimate the size of MBS market in India using the Malaysian ratio of outstanding mortgage securities to government securities, we infer that as on March 2003, the total outstanding mortgage securities in India should have been INR 174537 crores. This amount reflects the potential of MBS in India. If we would have taken the amount for 2004 then it would have been significantly higher due to the growth in government debt. The potential of secondary mortgages market in India is in sharp contrast to the total outstanding MBS as on March 2003, which amounted to INR 367.52 crores.
Also, in year 2002-2003, the percentage of total mortgage securities issued with respect to the total government securities issued in Malaysia was 10.9%. If we use the same estimate for the Indian market, then the total mortgage securities issued in India in the year 2002-2003 should have been INR 18091 crores. This is in sharp contrast to the mortgage securities issued in 2002-2003, which stood at INR 114.1 crores.
Considering the average loan size of INR 2 lakhs22, this extra liquidity of INR 18091 crores, could have facilitated housing finance to around 904550 people in India.
All the above estimates show that there is significant potential in the MBS market in India that can be harnessed for the good of nation. While all the estimates above throw up huge figures, the growth in the Indian MBS market will come at a steady pace and is likely to less in the absolute terms from the above estimates, considering that base of MBS issued per year from which we will be starting is just INR 144.75 crores (in 2004).