National Housing Bank’s Run As Independent Regulator Begins Amid Challenging Times
The National Housing Bank, which until recently was a subsidiary of the Reserve Bank of India, finds itself starting an independent journey in the midst of stress across India’s housing finance companies. While RBI remains the lender of last resort, it no longer regulates housing finance companies—a point reiterated by Governor Shaktikanta Das in June.
That leaves the NHB in the hot seat as it tries to strengthen regulation and supervision of a sector, which has grown rapidly over the last five years.
Rising Refinancing Needs
The NHB was set up by an Act of Parliament in 1987 as a developmental financial institution, following the entry of private HFCs. As per its charter, the NHB provides loans and refinancing to HFCs, commercial banks, cooperative banks and other lending institutions.
In the last few years, as the number of HFCs rose sharply, NHB has seen both its supervisory duties and the need for refinancing increase sharply.
At present, there are around 97 HFCs compared to 65 four years ago. The mortgage market today stands at Rs 19.1 lakh crore, of which HFCs have a market share of 36 percent, as of March 2019, according to a June 16, report by ICRA Ltd.
ICRA estimates that HFCs, in the current climate of tight liquidity and constrained bank or debt market funding, will require around 4.5 lakh crore in FY20 to maintain a growth of 10-14 percent. The funding gap has meant that more and more HFCs are tapping the NHB’s refinancing window.
As of June 2018, the NHB has provided over Rs 2.11 lakh crore worth of refinancing to lenders, with HFCs receiving 51 percent of the cumulative disbursements over time. The refinancing provided is nearly 40 percent higher than what it was four years ago.
In order to keep up with refinancing needs, the NHB raises funds through the Rural Housing Fund and the Urban Housing Fund, along with market borrowings.
The NHB issues zero-coupon bonds, tax-free bonds and NHB bonds. It also avails term loan facilities and funding through collateralised borrowing and lending obligation.
As refinancing requirements grow, the NHB may need more equity infusion from the government, said a former RBI deputy governor who spoke on the condition of anonymity.
To be sure, the NHB still has some room to increase refinancing commitments.
According to a ratings release from ICRA Ltd. on April 30, 2019, NHB’s capital adequacy remained sufficient with a CRAR of 18.66 percent. It’s gearing, a measure of financial leverage stood at 6.4 times in June 2018, lower than the cap of 10 times prescribed under RBI rules.
Emails and requests sent to NHB seeking an interaction on the regulator’s plans went unanswered.
Governance and Supervisory Capabilities
While NHB has conducted supervisory functions for HFCs for some time, it had the comfort of the RBI taking an overarching view on the financial sector.
With the RBI transferring its stake to the government, NHB will need to strengthen supervision capabilities particularly at a time when HFCs are facing stress. At least two HFCs — Reliance Home Finance Ltd. and Dewan Housing Finance Corporation Ltd. — have defaulted on repayment of dues in the past few months. Other firms are facing liability risks due to risk aversion towards non-bank lenders in the market.
The increasing challenges faced by the sector may require a strengthening of NHB’s organisational structure.
The NHB has around 116 full-time employees, according to its Annual Report for 2017-18. The organisation has functioned without a full time head since August last year, when Sriram Kalyanaraman, former managing director and chief executive officer, resigned following allegations of unethical practices.
Some question whether the NHB would be in a position to effectively supervise HFCs in a standalone manner without knowledge of how other NBFCs and banks are functioning in the mortgage market.
It would be better if HFCs are supervised by the RBI’s supervision department which has information and insights based on the practices being followed at banks and NBFCs, said a former RBI deputy governor, who spoke on condition of anonymity.
Need For Coordination With RBI
The separation of NHB from the RBI will also mean that the two regulators will need to establish a formal co-ordination mechanism.
In the past, two RBI-nominated directors were on the board of NHB but this was done away with in the Finance Act, 2018. The RBI now only nominates one member to the board of the NHB, while the remaining 5 members are government nominees.
Since the RBI will continue to regulate mortgages as a product, while NHB will regulate the HFCs, the two will need to ensure that there is no gap in guidelines issued by the two.
“There are some gaps in the guidelines issued by the RBI and NHB but in recent years the gap has been reducing. NHB has functioned as an enabler for the industry whereas other regulators have far more complicated and wide-ranging issues to deal with, which is why there is a difference in the way its functions are perceived,” said Leena Chacko, partner, Cyril Amarchand Mangaldas.
To be sure, the Financial Stability and Development Council is intended to be a forum where inter-regulatory issues are discussed. The NHB was recently included in the FSDC to help this process of coordination. However, Chacko said that the FSDC is not active as compared to what was envisaged as. “There were issues about hierarchy between regulators within the council and on how they would report information. The FSDC mainly looks are larger policy development aspects.” she said.
R Gandhi, former deputy governor at the RBI, said there have always been differences or gaps between the RBI’s regulations relating to home loans and regulations issued by NHB. However, regular formal and informal meetings take place between the RBI and NHB to resolve any such mismatches, Gandhi said, adding that the change in ownership should not create problems.