"MBS could turn out to be a viable proposition to invest in, but many measures are needed in developing the market," informed sources told PTI, adding National Housing Bank was in touch with EPFO on this matter.
EPFO is viewing investment in MBS as a more favourable route as risks are much lower than investing in equities, which promise highest return but are fraught with high risks.
The EPFO board, which is to meet on February 21, could take up the issue since the bulk of MBS originates from housing loans where default rate is very low, sources said.
Under MBS, the mortgage loans of consumers are bundled into one asset and sold to prospective investors. MBS offers an interest rate like any other debt instrument.
"Banks and housing finance companies can sell MBS in the market and raise additional funds at lower rates, which in turn would help them lower the home loan rates," the sources said.
Through MBS, banks and HFCs can reduce their reinvestment risks, which is the risk of earning lower return from cash flows from prepayment of loans.
NHB is understood to have had talks with EPFO over the issue when the NDA was in power, but there was no progress due to certain "hitches" in the form of high stamp duties and lack of stringent foreclosure laws.