Tighter housing finance norms on cards after IL&FS, DHFL defaults expose risks

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Published: March 11, 2019 5:23 AM

Move latest in a series of initiatives after IL&FS & DHFL fiasco.

The banking system continued to face liquidity constraints. Daily average liquidity deficit stood at Rs 94,585 crore in the week through February 28.

The National Housing Bank (NHB) is considering tightening the asset-liability management (ALM) norms for housing finance companies (HFCs) to help detect their solvency concerns early to ensure swift course correction, sources told FE.

“The ALM guidelines relating to forecasting and analysing ‘what-if scenario’ and preparation of contingency plans could be revised by the regulator, among others,” said an industry source.

This will be the latest in a series of steps, including tougher capital and borrowing norms, proposed by the regulator after defaults by IL&FS entities and concerns about DHFL’s repayment ability have exposed risks in the shadow-banking space, at a time when liquidity remains tight.

While rollovers/redemptions of Rs 1-1.2 lakh crore are lined up for March alone (in the overall NBFC space), these companies are finding it difficult to raise funds at reasonable rates through short-term money market instruments.

The share of HFCs in fresh issuance of commercial papers (CPs) has crashed from 28.5% in April 2018 to just 8.2% in January 2019, according to a report by Care Ratings. Similarly, the share of NBFCs dropped from 39.6% in May 2018 to 24.5% in January. Though the cost of borrowings (via CPs) for HFCs eased to 7.65% in January from the FY19 peak of 8.21% in November, it is still much higher than the April 2018 level of 6.83%.

For other NBFCs, the cost touched 7.76% in January, against 7.12% in April 2018. Low-rated NBFCs had to fork out even more to raise money.

The banking system continued to face liquidity constraints. Daily average liquidity deficit stood at Rs 94,585 crore in the week through February 28, though it eased from Rs 1,28,851 crore in the previous week.

The asset-liability management in the housing finance sector typically factors in five key areas: liquidity risks; market risks; funding and capital planning; profit planning and growth projection; and forecasting and analysing ‘what if scenario’ and preparation of contingency plans.

The NHB last week proposed to steadily raise the capital adequacy ratio requirement of HFCs to 15% of their risk-weighted assets by March 2022 from the current 12%. Similarly, it has also decided to reduce the limit of borrowings by HFCs to 12 times of their net-owned funds (NOF) by March 2022 from 16 times now. Earlier this fiscal, a Credit Suisse report had said though HFCs had come out with decent records on asset minus liabilities, with shortfall reported at under 10% of their loan books over the near term, easier guidelines could be “distorting the true picture”.

This is because HFCs are allowed to report ALM on behavioural basis (factoring in loan prepayments and liability roll-overs) instead of using run-down rates (repayment) as per loan contracts. HFCs typically base their ALM reporting on their own historical experience of run-down rates (over, say, the last five years), while other NBFCs report their ALM on a contractual basis. “This, in an environment of abundant liquidity, could lead to an illusion of shorter-tenure asset book — requiring a matched shorter-tenure liability book,” it said. A senior government official, however, had refuted claims of lax norms for HFCs.

Also, given that lending by HFCs are backed by solid collateral (they typically lend up to a maximum of 80% of the value of mortgage houses), they can’t be equated with other NBFCs with much-diversified portfolio and higher risky assets, said one of the sources cited above. Unless HFCs divert funds for other purposes by breaking rules and make losses in this process, they won’t turn insolvent purely on the basis of the performance of their housing portfolio, he added.

Among other regulatory steps for non-bank lenders, the central bank last month tweaked risk-weight norms for loans to NBFCs, making it more difficult for unrated ones to raise funds, although well-rated NBFCs can mop-up resources more easily. In October 2018, the banking regulator had said it would also tighten norms on asset and liabilities for NBFCs.

To ease liquidity pressure on HFCs, the NHB had raised its own refinancing target for 2018-19 fiscal (July-June) to Rs 50,000 crore from Rs 30,000 crore. As of February 22, it disbursed Rs 16,636 crore against a sanction of Rs 29,642 crore, though the offtake is expected to pick up this month due to higher redemption pressure on HFCs.

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