The National Housing Bank’s (NHB) new framework for housing finance companies (HFCs) will structurally strengthen the sector and increase investor confidence at a time of liquidity stress among non-banks, according to credit rating agency Crisil.
NHB’s revised guidelines make three key amendments: The minimum Tier 1 capital adequacy to be maintained by HFCs has been increased to 10 per cent from 6 per cent, while the overall Capital Adequacy Ratio (CAR) requirement has been increased to 15 per cent in a graded manner from 12 per cent earlier; the maximum leverage that HFCs can take up has been reduced to 12 times from 16 times over a period of three years; and the ceiling on the deposits that HFCs can mobilise has been lowered to three times of net-owned funds from five times. Crisil’s analysis of 25 HFCs, which account for over 90 per cent of the industry’s assets under management (AUM), shows that all of them comply with the 400 basis points (bps) higher Tier 1 CAR requirement announced by the NHB recently.
Krishnan Sitaraman, Senior Director, Crisil Ratings, said, “Stronger balance sheets and increased capital levels will make HFCs better placed to absorb asset-side risks in future.”
With mortgage growth expectations also muted, the new norms are not expected to constrain too many players, the agency said. Additionally, it assessed that as on March 31, 2019, many HFCs had a cushion of at least 250 basis points over the 10 per cent Tier 1 CAR requirement. Crisil said the smaller lot, especially those backed by private equity, enjoy significant cushion over the revised regulatory requirements as of now.
As for leverage, most of the HFCs analysed were well within the stipulated 12 times required to be adhered to by March 2022, while the industry average is below seven times.
“To be sure, some have levered beyond 12 times in the past couple of years, but those have been few and far between. In any case, such gearing is no longer an option for the road ahead. On public deposits, too, most HFCs are well below the stipulated requirement,” the agency said in a note.