New Norms Fail To Address Key Risk For Housing Finance Companies, Says Moody’s 

The National Housing Bank’s proposed guidelines to tighten capital adequacy and leverage norms for housing finance companies are ’credit positive’ for the industry but don’t address the key issues of funding and liquidity, according to Moody’s Investors Service.

The new guidelines would limit growth in disbursements for housing finance companies and cap their maximum exposure to the debt capital markets, Moody’s said in a note on Monday. The minimum capital adequacy requirement will increase gradually by 1 percent annually from 12 percent now to 15 percent by March 2022. Also, the maximum leverage, calculated as total debt plus deposits as a percentage of net-owned funds, will decline by 1 percent from 16 times currently to 12 times by March 2022. Maximum public deposits that the housing finance companies can hold will also be limited up to three times their net-owned funds.

The proposed changes were put out in a discussion paper by NHB last week for public comments.

As a result of the proposals, Moody’s expects a continued slowdown in loan growth and a lower leverage for some of the smaller mortgage lenders even as most large peers are already compliant with the new guidelines.

The new rules, however, won‘t address refinancing risk for these lenders.

Rise in short-term borrowings to fund long-dated assets led to higher volatility and risk for mortgage lenders, Moody’s said, highlighting the low backup of liquidity that these companies maintained. Tighter liquidity since the defaults by Infrastructure Leasing and Financial Services in September 2018 made it tougher for housing finance companies to refinance maturing obligations—reflected in their commercial paper yields, Moody’s said.

Commercial paper yields rose for the top five mortgage lenders:

• For HDFC Ltd., it rose from 6.5 percent in October 2017 to 8 percent in October 2018. The last-traded yield in March stood at 7.5 percent.
• For LIC Housing Finance Ltd., the yield rose from 6.2 percent in October 2017 to 7.5 percent in October 2018. It remained close to 7.6 percent in March.
• In case of PNB Housing Finance Ltd., the yield jumped to 7.5 percent in October 2018 from 6.2 percent in October 2017. The last-traded yield in March stood at 7.7 percent.
• For Indiabulls Housing Finance Ltd., it rose from 6.8 percent in October 2017 to 8 percent in October 2018, while for Dewan Housing Finance it rose from 6.4 percent to 9 percent. The last-traded yield for both wasn’t available.