Small HFCs may find it difficult to grow home loan book as bank lending dries up

Housing finance companies (HFCs) outside the top 10 may not be able to grow their home loan book as banks, which are the only source of funding for most of them, have turned conservative in lending to these companies after the IL&FS imbroglio and DHFL’s financial stress.

There are more than 100 registered HFCs. Of these, only the top 10 or so have the ratings and market standing to have reliable and stable access to debt capital markets – placing debentures with funds or individuals, according to the report of the Reserve Bank of India’s committee on the development of housing finance securitisation market.

Only source of funding

Many of the smaller HFCs rely on bank borrowing as their only source of funding. They also have access to refinance facilities of the National Housing Bank. Bank lending to HFCs generally has a maturity of less than five years. “For both banks and HFCs, home loans present an asset-liability mismatch problem – the maturity of assets (home loans) is much longer than that of liabilities.

“The challenge is much more acute for HFCs, especially those that are not among the top 10, where the only source of funding for them is banks and, if for any reason this source dries up, they cannot grow their home loan books,” the report said.

The weighted average maturity of the banking system’s deposits works out to around 2.5 years.

In the case of HFCs, 40 per cent of their funding is from banks (including debentures issued to banks) and 30 per cent from debentures issued to non-banks (mutual funds). Thus, the main source of funding for HFCs is bank borrowing.

“Most home loans have maturity of 15 to 20 years at the time of origination. For younger borrowers, the maturity can go up to 25 or even 30 years. While prepayments are quite common, even after adjusting for prepayments, home loans have a maturity of eight to 10 years, making them the longest maturity assets for banks and HFCs.

“In addition to the long maturity, prepayments and balance transfers also create competitive pressure as well as a degree of uncertainty regarding maturity of home loans,” the report said.

The committee emphasised that the emergence of specialised HFCs for the low-income and informal segments is an important trend that must be encouraged, given the need for alternative underwriting approaches.

“Sustainable funding models will be especially critical because these entities will, at least initially, have weak balance sheets, even if they have strong operations and underwriting.

“There are parallels here to the experience of micro finance NBFCs whose growth in the last decade has been fuelled by diversification of liabilities, including securitisation,” the report said.

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