Residential and commercial buildings stand in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

NHB Proposes Higher Buffers, Lower Borrowing Cap For Housing Finance Companies

The National Housing Bank proposed to increase the minimum capital buffers and cap borrowing limits for mortgage lenders as it aims to counter solvency and over-leverage risks in the aftermath of the IL&FS crisis.

The housing market regulator proposed to progressively increase the minimum capital adequacy ratio from 12 percent of aggregate risk-weighted assets and risk-adjusted value of off-balance sheet items to 15 percent by March 31, 2022, according to a discussion paper it released for public feedback. The minimum buffer level—a combination of tier 1 & 2 capital—would be raised by 100 basis points every year till 2022.

The proposed amendments to regulations were expected as after the Infrastructure Leasing & Financial Services Ltd. crisis, several analysts had cited that many non-banking finance companies and mortgage lenders had high-leverage ratios, Keki Mistry, vice-chairman and chief executive officer at HDFC Ltd., told BloombergQuint. “To my mind, this will not have a material impact on many players. At least as far as HDFC is concerned, there will be no impact whatsoever.”

Mortgage lenders struggled with a credit crunch following defaults by IL&FS. That had triggered fears of a contagion in the credit market, forcing the government to take over the infrastructure group with a debt of more than Rs 90,000 crore.

Deo Shankar Tripathi, managing director and chief executive officer at Aadhaar Housing Finance Company Ltd., said the purpose is to ensure that mortgage lenders have sufficient capital and are not over-leveraged. This will encourage infusion of capital rather than running business with borrowed funds, he said. The housing finance companies finding it difficult to comply may sell their portfolio to free capital and become compliant, according to Tripathi. But since risk weight for home loans is at lower level, managing the proposed capital ratio will not be difficult, he said.

According to Supreeta Nijjar, vice-president at ICRA Ltd., most mortgage lenders would be able to meet the revised norms as most of them have a CAR of 15-16 percent. They have an adequate cushion to raise additional tier 2 capital, she said.

Lower Borrowing Limit

The housing finance regulator also proposed to reduce the limit on the overall borrowings of mortgage lenders in a graded manner from the current 16 times of net-owned funds to 12 percent March 31, 2022.

According to ICRA, only seven of the top 20-30 HFCs had gearing levels of more than 10 times as on March 31, 2018, lower than the proposed ceiling limits. Nijjar said well-rated HFCs are expected to maintain cushion over and above the regulatory limits and thus the need to raise external capital could remain high for some of the HFCs if the growth momentum was to continue.

Tripathi said barring two or three large companies, others have borrowings within the proposed limit of 12 times. “As it stands, neither credit rating agencies nor banks are comfortable with lending to HFCs when the leverage is more than 10-12 times.”

The NHB also proposed to place a ceiling of three times the net-owned funds on public deposits collected by deposit-taking housing finance companies. But ICRA said none of the companies had deposits in excess of 1.5 times as of March 2018, and the proposed change may not impact the market.

Ravindra Sudhalkar, executive director and chief executive officer at Reliance Home Finance Ltd., however, cautioned that regulator needs to make capital easily available for mortgage lenders with strong balance sheets as a liquidity crunch acts as a roadblock to growth.