LIC Housing’s RMBS listing: A new investment opportunity?

Link If you’ve been tracking India’s financial markets lately, you’ve likely noticed a quiet but profound shift in the country’s housing finance landscape. On May 5, 2025, LIC Housing Finance (LICHFL) made history with the debut listing of its residential mortgage-backed securities (RMBS) on the National Stock Exchange—a move that’s not just a milestone for the company but a signal that a new era of investment opportunities is opening up in India’s debt markets.

What sets LIC Housing’s RMBS apart?

Before diving into how LIC Housing’s RMBS is unique, it is important to understand what exactly RMBS are. They are investment products that are made up of home loans. Imagine this – ABC bank gives thousands of housing loans to people. Instead of waiting for years to get that money back through monthly EMIs, the bank bundles these loans together and sells them as a package to investors. These packages are called RMBS. Thus, unlike traditional debt instruments, RMBS are securities backed by a pool of residential mortgage loans.

In LIC Housing’s case, the special purpose vehicle—India Residential Mortgage Trust 2025 01—issued pass-through certificates (PTCs) totalling ₹1,000 crore, backed by a housing loan receivables pool of ₹11.12 billion originated by LICHFL. These securities have a 20-year maturity and offer a monthly coupon rate of 7.26%, making them particularly attractive for investors seeking steady, long-term returns.

What’s truly unique about this issuance is the transparent price discovery mechanism. Instead of a pre-agreed rate between seller and buyer, the securities were sold via an electronic bidding platform on the NSE. This approach brings greater transparency and efficiency to the Indian securitization market, setting a new benchmark for future transactions.

Why is this a big deal for investors like you?

You might wonder why you should care about a new debt instrument. Here’s why LIC Housing’s RMBS listing is worth your attention:

• High credit quality: The PTCs are rated AAA (SO), reflecting the robust credit profile of the underlying loan pool and the credit enhancements built into the structure.

• Attractive yield: With a 7.26% coupon paid monthly over 20 years, these securities offer a compelling yield, especially considering the current interest rate environment and the long tenure.

• Portfolio diversification: RMBS provide exposure to the Indian housing finance sector, a segment that’s historically demonstrated resilience and growth potential. Including these in a fixed-income portfolio could help you diversify beyond traditional corporate or government bonds.

• Liquidity and transparency: The listing on the NSE and the use of an electronic bidding platform enhance liquidity and price transparency, making it easier for you to enter or exit positions compared to privately placed debt instruments.

• Participation in India’s housing growth story: By investing in RMBS, you’re indirectly supporting homeownership and financial inclusion in India, as the funds raised enable housing finance companies to extend more loans to aspiring homeowners.

How does the structure work?

• Cash reserve fund: A portion of collections from the underlying loan pool is set aside in a cash reserve fund, which acts as a buffer against payment delays or defaults.

• Excess interest spread: The difference between the interest earned from the loan pool and the coupon paid to investors provides an additional layer of protection.

• Subordination: RMBS are split into layers or levels. Investors in the bottom layers (called subordinated tranches) take the first hit if there are any losses. Only if the losses go beyond their share do the top-layer investors (senior tranches) get affected. This setup ensures that senior investors are well protected, making the investment safer for them

These features collectively ensure that the securities maintain their high credit rating and provide timely payments to investors, even if some borrowers in the underlying pool default or prepay their loans.

What are the risks?

• Prepayment risk: If borrowers in the underlying pool repay their loans early, the cash flows to investors may be affected, potentially impacting returns.

• Credit risk: While the securities are highly rated, a significant deterioration in the performance of the underlying loan pool could affect payments.

• Market liquidity: Although the NSE listing improves liquidity, the secondary market for RMBS in India is still nascent, and trading volumes may be limited initially.

However, the involvement of NHB and RDCL, robust deal structuring with clear terms, risk mitigations, and safeguards, and credit enhancements provide a strong foundation for investor confidence.

The broader impact

LIC Housing’s successful RMBS listing is more than just a one-off event—it’s a catalyst for a broader transformation. The National Housing Bank (NHB), through its newly established RMBS Development Company Ltd (RDCL), is actively nurturing this market by offering structuring support, liquidity, and credit enhancement services. The regulator expects housing finance companies to raise Rs. 10,000–12,000 crore through listed RMBS deals in FY26, spread across seven to ten transactions.

This influx of capital will allow housing finance companies to reduce their reliance on traditional bank funding or deposits, unlocking more resources for affordable home loans and fuelling India’s housing sector growth.

What’s next?

LIC Housing’s RMBS listing has set the stage for a wave of similar issuances. Other housing finance companies are reportedly preparing to enter the market, and the NHB expects up to ten deals in FY26. The move is also drawing interest from long-term institutional investors like insurance companies and pension funds, which could further deepen the market and enhance liquidity. If you’re an investor looking for new avenues in fixed income, or if you want to participate in India’s housing finance growth story, RMBS could be a compelling addition to your portfolio. The combination of high credit quality, attractive yields, and the opportunity to diversify makes this a space worth watching closely.

Conclusion

The RMBS list from LIC Housing is not merely another financial product to hit the capital markets in India, it represents the start of a new asset class in India. For the first time, you can now invest in a transparent, liquid, and high-quality rated instrument linked to the housing finance sector in the country. The initial issuance has been met with an overwhelming response that suggests a healthy appetite from investors, while the need for regulatory push shows that this is only the beginning.

As the RMBS market develops, you can expect new products, more participation from institutional investors, and a shift into different risk-return ranges of products. For now, however, you have the rare opportunity to invest at ground zero of the securitization revolution that is taking place in India.