Housing Finance Firms Banking On High Prepayment Rates For LAP, Developer Loans: Moody’s
Housing finance companies, despite their relatively stable asset quality, have not been immune to strains being faced by non-bank lenders. A key reason for this is the asset-liability mismatches these lenders face and the weak liquidity profiles.
A recent report by rating agency Moody’s Investors Service noted that HFCs have the lowest cash as a percentage of total assets on their balancesheets. The report had highlighted this as part of a broader comment on the limited ability of NBFCs to tide over a protracted period of liquidity stress.
Detailing the view of the rating agency, Srikant Vadlamani, vice president of the Financial Institutions Group at Moody’s, explained that HFCs have longer tenure products, which makes their liquidity position look weaker. Vadlamani, however, also pointed out that a risk for HFCs, may emerge from the assumption that pre-payment rates across products like Loans Against Property and developer loans will remain high.
“We have seen the HFCs get into non-traditional products, either in the form of LAP or lending to developers. The risk there is that the repayment assumptions on these products have been built in assuming that the pre-payment rates on these products will remain high,” said Vadlamani. For instance, he explained that in the LAP category, while the contractual tenure is 10-15 years, pre-payments are high and, hence, the product would actually get repaid within 3-5 years.
The risk is that those pre-payments won’t come in now because overall liquidity in the market has dried up, which would make the ALM profiles worse than what they seem on paper.Srikant Vadlamani, Vice President - Financial Institutions Group, Moody’s Investors Service
Not All Banks Can Buy NBFC Portfolios
As a way out of the current liquidity crunch, a number of NBFCs and HFCs are hoping to sell their loan portfolios to banks. State Bank of India has said that it is looking to buy upto Rs 45,000 crore in NBFC loan portfolios this year.
However, apart from a few large banks, the capacity to buy NBFC loan portfolios is limited. Private banks, who are running high loan-to-deposit ratios, do not have space to buy loan portfolios. PSU banks have the room to buy portfolios but do not have the capital.
The banking system is impaired from a capital perspective. Over the last five years, that impairment didn’t get reflected in any other parts of the economy because someone else was stepping in. Now, as they (NBFCs) exit, banks don’t have the capacity to step in. They may not be liquidity constrained but they are capital constrained.Srikant Vadlamani, Vice President - Financial Institutions Group, Moody’s Investors Service
Besides, the exposure of some of the banks to NBFCs already accounts for 5 percent of their overall loan book, while some exceed it, Vadlamani noted. “The banks would also be constrained in terms of the sectoral concentration that they are in comfortable taking in,” he said.
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