While the proposed new guidelines by National Housing Bank (NHB) to tighten the capital adequacy and leverage norms of the country's housing finance companies (HFCs) would be credit positive, they do not address issues regarding the key credit risk of these companies, funding and liquidity, said Moody's Investors Service.
The proposed guidelines are credit positive because they would limit HFCs' credit growth and cap their maximum exposure to the debt capital markets, the global credit rating agency said in a study.
Moody's said volatility in the debt financing markets is a key risk for the HFCs because short-term funding is increasing and is used to fund long dated assets. Additionally, these companies maintain very little backup liquidity.
Since September 2018, HFCs' asset-liability mismatch has been exacerbated after an Indian conglomerate group, Infrastructure Leasing & Finance Services (IL&FS), defaulted on certain debt market obligations. Following the default, liquidity in India's debt market tightened sharply, leading to increased risk that the HFCs would be unable to refinance maturing obligations, which was reflected by a sharp increase in their commercial paper yields.
Although, the HFCs have since September 2018 slowed loan growth to conserve liquidity, the contagion effect of HFCs' liquidity issues can be severe because these companies are significant borrowers from the banking system, cautioned Alka Anbarasu, VP-Sr Credit Officer and Jason Sin, Associate Analyst, Moody's Investors Service. Rated banks' exposure to HFCs was between three per cent and five per cent of total loans as of 31 December 2018.
Still, the NHB's proposed guidelines will benefit HFCs and lenders to the HFCs, particularly commercial banks, because the guidelines will help limit HFCs' credit growth, they said.
Under the proposed guidelines, HFCs' minimum capital adequacy requirement will gradually increase by one percentage point annually to 15 per cent by March 2022 from 12 per cent as of March 2019. Additionally, the maximum leverage, calculated as total debt plus deposits as a percentage of net-owned funds, will gradually decline by one percentage point annually to 12 times by March 2022 from 16 times as of March 2019.
The maximum public deposits that the HFCs can hold will also be restricted up to three times their net-owned funds by March 2022. Although, most of the large HFCs comply with these guidelines, Moody's expects that some of the smaller HFCs will slow their loan growth or increase capital and lower their leverage over the next few years.