The public deposits being taken by eligible HFCs are capped at three times of their NOF, according to the notification.
Housing finance companies (HFCs) will have to raise their capital adequacy to 15% of their risk-weighted assets by March 2022, from 12% now, the National Housing Bank (NHB) has notified. This comes at a time when solvency as well as asset-liability mismatch in the shadow banking space has come under greater regulatory scrutiny, more so after the IL&FS default.
The housing finance regulator has also directed the HFCs to trim borrowing limit to 12 times of their net-owned funds (NOFs) in a phased manner by March 2022 from 16 times now. The public deposits being taken by eligible HFCs are capped at three times of their NOF, according to the notification.
“The tier-I capital, at any point of time, shall not be less than 10%,” Dakshita Das, MD & CEO of NHB, said in a directive.
The capital adequacy has to be raised by one percentage point each in the next three years through March 2022, the NHB said. Similarly, the borrowing limit will have to be cut to 14 times of HFCs’ NOF by March 2020, 13 times by March 2021 and 12 times by March 2022.
Analysts have said the regulator’s move on steady improvement in solvency parameters, such as capital adequacy, will ensure that HFCs remain in fine shape and their capacity to absorb shock rises. Similarly, tightening their borrowing limit will basically prevent HFCs from getting into the unavoidable debt trap where they will ultimately default on their payment obligation, just like some of the IL&FS entities. The proposal to implement the changes fully over a three-year period is aimed at giving HFCs enough time to get their act together and stay afloat, at a time when they are already facing liquidity constraints.
Recently, the Reserve Bank of India also sought to tighten various norms for NBFCs, proposing to introduce a liquidity coverage ratio (LCR), or the proportion of high liquid assets set aside to meet short-term obligations, for all NBFCs with an asset size of more than `5,000 crore. NBFCs will have to maintain a minimum of 60% of LCR as high-liquid assets from April 2020, which will be raised in a phased manner to 100% by April 2024.
In October last year, just after the IL&FS crisis flared up and concerns about the repayment ability of some HFCs, including DHFL and Indiabulls, started to depress market sentiments, the NHB had raised its refinancing target for 2018-19 by 25% to Rs 30,000 crore from the initial aim of Rs 24,000 crore. Later, the target was again raised to rs 50,000 crore after the RBI approval. As of February 22, it had disbursed Rs 16,636 crore.
Earlier this month, DHFL defaulted on repayment, which led to a slew of rating downgrades of the company. The company has now said it has gathered adequate resources to meet future payment obligations.
HFCs are exposed to various risks arising out of counter-party failures, funding risks and risks pertaining to liquidity and solvency, as any other financial sector player. So, there was a need to review the regulatory framework of HFCs, the NHB had earlier said, proposing to revisit the norms.
“For the purpose of determination of the borrowing limits, the NOF will be calculated as per the audited accounts as of March 31 of the previous year,” the NHB said.