With the Reserve Bank of India’s (RBI) new guidelines coming into effect on Wednesday, housing finance companies (HFCs) are stepping into the new year under stricter regulatory oversight.
The revised norms are likely to nudge HFCs to borrow more from the money market, which could increase the borrowing cost by 20-30 basis points.
In the revised norms announced in August last year, the central bank reduced the ceiling on the quantum of public deposits by deposit-taking HFCs from three times to 1.5 times of net-owned funds.
The reduction of the limit by RBI will impact the ability of the housing finance companies to raise deposits. Turning to the money market to raise funds is expected to hit the profit margins of these companies, say experts.
“Now, we will have to look for alternative sources of funds such as non-convertible debentures (NCDs) to support our loan growth,” the chief executive officer of a housing finance company told FE.
“Compared to bank borrowing, raising funds from NCDs are 20-30 basis points higher for AAA-rated HFCs. Currently, raising funds via short-term NCDs is costlier than raising funds through long-term NCDs,” he said.
He added that the net interest margins of HFCs may see compression due to borrowing at a higher cost. The new rules require HFCs to maintain 15% liquid assets against public deposits held by them in a phased manner, up from 13% at present.
Major HFCs that raise deposits include LIC Housing Finance, PNB Housing Finance, Can Fin Homes, and Sundaram Home Finance. There are 97 HFCs in the country, of which deposit-taking NBFCs, including HFCs, are only 26.
“The new rules are aimed at bringing deposit-taking HFCs on a par with non-banking financial companies,” said a banking analyst of a brokerage firm.
New regulations also mandate that HFCs should ensure that the full asset cover is available for public deposits accepted by them at all times. They will have to inform the National Housing Bank in case the above asset cover falls short of the liability on account of public deposits.