The Reserve Bank of India’s (RBI) proposed changes in the regulatory framework for Housing Finance Companies (HFCs) seek to streamline regulations in a defined manner and reduce the regulatory arbitrage for HFC, analysts said.
Experts believe the proposed guidelines are not disruptive to the way listed HFCs are currently operating.
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RBI’s proposed rules call for a clear demarcation between loans towards homes and other types of loans, define systemically important HFCs, propose doubling of net owned funds threshold, and seek to forbid an HFC from lending simultaneously to a construction company as well as individual homebuyers in that project, within its group.
Any company to be classified as an HFC should have more than 50 percent of net assets in the nature of ‘qualifying assets’ as prescribed for HFCs. Of such qualifying assets, at least 75 percent should be towards individual housing loans, RBI said.
Morgan Stanley observes that most listed HFCs comfortably meet the above criteria.
“A clear definition of HFC business mix, amid structural profitability challenges for many HFCs, could provide an option to incumbents to diversify more into other segments like loans against property, unsecured consumer loans, etc. This is important because HFCs enjoy carved-out limits with respect to funding from mutual funds, insurance companies, etc.,” Morgan Stanley said.
The minimum Capital requirements (CRAR and risk weights) prescribed for HFCs currently is 12 percent. RBI proposes to progressively increase this to 14 percent by March 31, 2021 and to 15 percent by March 31, 2022, it said.
Jefferies noted that CRAR for HDFC (17.7 percent), Indiabulls (29 percent), PNB Housing (18 percent) is above the 2022 threshold, while that for LIC Housing (14.4 percent) is tad below the threshold and they may look to raise Tier-I bonds.
Further, HFCs will need to maintain 13 percent of deposits in liquid assets as against 12.5 percent earlier, the RBI draft said.
Jefferies believes that HDFC is unlikely to be affected as it takes deposits and has maintained SLR balances much above the requirement.
In order to address concerns on double financing due to lending to construction companies in the group and also to individuals purchasing flats from the latter, the HFC may choose to lend only at one level, RBI said.
If the HFC takes exposure in its group entities (lending and investment) such exposure cannot be more than 15 percent of the owned fund for a single entity in the group and 25 percent of the owned fund for all such group entities. For loans to individuals, who choose to buy housing units from entities in the group, the HFC would follow arm’s length principles.
Analysts believe that this might be relevant for HFCs that also have real estate companies within the group like Indiabulls Housing Finance and Piramal Enterprises among others.
Gagan Banga, Vice Chairman and MD, Indiabulls Housing Finance believes that the move will aid in HFCs attracting more capital on debt and equity fronts.
“These regulatory norms will help build confidence into HFCs and improve their ability to attract more debt and equity capital and therefore focus on individual homebuyer,” Banga told CNBC-TV18.
Speaking on the impact on margin, he said that the margins of housing finance companies will change.
“Margin on developer loans are higher but liquidity is weaker. On a sustainable RoA and RoE basis, doing individual loans will turn out to be as profitable as developer loans,” Banga told CNBC-TV18.
However, Banga added that more clarity will require on lending rules for a project and the home buyers.
The proposed changes in the rules have come following RBI’s taking over as the regulator of mortgage lenders from the National Housing Bank (NHB) in August 2019. Following the review of the rules, home financiers will now be regulated as a category of NBFC.
Under the NHB regulations, there was no formal definition of housing finance.
