Budget 2020 India: While the home loan segment has erred in the recent past, it must still be protected and supported. Here is why.
Budget 2020 Expectations: The apparent economic slowdown in India can’t be singled out as the primary reason behind the plummeting home loan industry. The cause could be attributed to some domestic challenges faced by the sector over the last few years.
The overall mortgage industry, particularly NBFCs, were majorly struck by two things — first was the over optimism of some developers on the demand-supply situation and their misplaced analysis of the fluctuating prices of the housing segment in various markets. Led by their aggressive approach, these developers overleveraged, and at the back of a global downturn as the economy slowed down, the demand for housing dipped, it happened also partly due to non-completion of projects. This was the first phenomenon that hit the banks and NBFCs, as they fell prey to the oversupply and non-completion chaos of developers by financing these projects.
The second occurrence that hit the sector harder than the previous one was the IL&FS fiasco. The payment default of bank loans by IL&FS came at a very wrong time for the NBFCs. The issue hit them while they were reeling through slowing sales of realty and the debt providers pulled back. Adding to the plight were the rumours of reckless exposure to developers on the wholesale side, which further worsened the situation of the housing finance companies.
The housing finance predicament did not end at that as there was another tragedy at play, running parallel. As investors realised that real estate at that moment wasn’t a profitable proposition, they turned towards the mutual funds industry with all their funds. Mutual funds, on the other hand, identified NBFC bonds and commercial papers as opportunities and offered them 40% of incremental funds they received from the new investors. The NBFCs in turn invested it back in the real estate funds.
However, despite these upheavals, NBFCs and HFCs have been leading the housing finance innovation, with 40% market share of the home loan industry. The segment managed to earn the status-quo by way of reaching out to the underserved and unserved geographies and demographics viz. owners of micro and small businesses, employees of small and micro enterprises. Over and above that, the NBFCs and HFCs demonstrated audacity by providing home loans to people living and buying properties on the peripheries of large and medium cities.
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With that at the backdrop, while the home loan segment has erred in the recent past, it must still be protected and supported. Primarily because the affordable housing segment is on the rise and shows signs of long-term prevalence. With that said, India will require more NBFCs and HFCs. One way to revive the segment is to channel the PSU bank funds towards the housing loan industry. Apart from SBI, all PSU banks have been missing from the segment. In view of these developments, here’s a low down of some budget recommendations for the housing finance industry:
a) National Housing Bank (NHB) should expand its finance development role to support HFCs: As a part of crisis management, NHB must aim at inflating refinance considerably. The refinance sum to be disbursed by NHB must be proportionate to the market size and must reach lenders of all sizes. The small-sized HFCs with smaller balance sheets and credit rating constraints must also be taken into consideration. NHB could also consider offering loans against mortgage guarantee to small-time HFCs.
b) Home co-origination model with Banks and NBFCs/HFCs should be the way forward: This combination would serve the current home loan industry situation well. More so, because the HFCs have the expertise in providing home loans and the banks have the money. Corresponding to the above point, PSU banks must have set targets to co-originate home loans, more specifically for the PMAY programs.
c) Ensure implementation of securitisation committee recommendation: The securitisation committee set up by RBI to offer recommendations to boost the securitization of the market must be considered. In a very precise recommendation made by the committee it mentioned setting up capital for market maker companies and the government simply needs to ensure implementation of these recommendations.
d) External Commercial Borrowing Norms: In order to ensure smaller and medium sized HFCs make profits too, ECB eligibility norms must be relaxed. In fact, it is recommended that ECBs allow larger amount of borrowing for the medium size HFCs.
e) The government should help HFCs/NBFCs and CPs to recuperate from the loss of faith it experienced from the industry stakeholders: Given the whole mutual fund and investors tension between HFCs and NBFCs, the government must aid to boost market sentiments through proactive actions by SEBI. To begin with, the measures could be limited at the companies with strong balance sheet. That could help revive sentiment for the industry overall. This could be profitable for the sector in the long run.
(By Shrikant Shrivastava, Chief Risk Officer, India Mortgage Guarantee Corporation)