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Housing Development and Finance Corporation (HDFC) has introduced a new financial instrument to raise long term funds to increase its capacity for lending in the housing finance market.

The HDFC has proposed People's Merchant Bank Ltd (PMBL) to arrange a securitization issue for Rs. 260 million in order to mobilise the funds required through a securitization process.

"This innovative instrument launched for the first time in Sri Lanka was in the form of Trust Certificates secured by a pay through type of securiization where receivables pertaining to HDFC's EPF loan portfolio and a part of mortgage portfolio were securitized," HDFC General Manager C.A. Sarathchandra said.

The securitization notes, having a biannual maturity profile were entirely placed with the National Savings Bank (NSB) by the PMBL. The trustee to the issue is Deutsche Bank Ltd, while E & Y Law Ltd, executed the relevant legal documentation.

"HDFC since the last few years has expanded its annual lending turnover by about 200 percent. The core objective of HDFC being the provision of Housing Loan facilities to Low Income groups at a reasonable rate of interest for long periods such as 15 to 20 years, it was looking for matching funds to be invested in lending.

However, since all existing sources of funds in the market are not long term, HDFC had been looking for innovative sources of finance, for some time. Asian Development Bank and other international agencies from who HDFC sought finances in the past also had been advocating to go for innovative financial instruments such as securitization.

The Trust Certificates/Bonds which are collaterilised by EPF balances and mortgages and receivables, appear on the HDFC financial statements as debt and thus it is not an off Balance Sheet item as in pass through securitization issues. The cash flows from the assets or the loans, however are utilised to service the bond/securitization notes," Mr. Sarathchandra said

He said that the advice given by the ADB, had initially become HDFC's motivation to carry out securitization.

"Through this exercise, HDFC was able to raise funds at an attractive rate of interest, which was marginally above the guilt edged rates." He said that the success of these issues are bound to encourage other institutions to follow suit.

According to CEO/Managing Director PMBL, Neomal Soyza, the unique feature of the issue was the low level of risk borne by the ultimate investor (NSB), due to the zero default rate applicable to EPF loans.

The signing of legal documentation and disbursement of funds to HDFC took place at a function at the Ministry of Housing and Plantation Infrastructure at "Sethsiripaya", Battaramualla on Tuesday attended by A. Kandappah, Chairman, HDFC, C.A. Sarathchandra, General Manager, HDFC, Neomal Soyza, CEO/Managing Director PMBL, S.H. Piyasiri, Senior DGM, NSB, Tyrone Haman, Head of corporation division, Deutsche Bank Ltd, and Cyril Perera, Consultant, E & Y Law Ltd.

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