“The message the regulator is trying to give is that there are circumstances which have forced it to make HFCs more conservative in their credit delivery. As for HFCs which have a capital adequacy ratio of over 15 per cent, they might have to raise capital for not just shoring up but for growth,” says Ashwini Kumar Hooda, deputy managing director of Indiabulls Housing
Adds Manish Jaiswal, chief executive officer at Magma Housing Finance: “It will address systemic risk of capitalisation and leverage at a sectoral level, but at the same time it might impact the return on equity (RoE) specifically for some large HFCs which are over-leveraged with thinner return on assets.”
Currently, leading HFCs Housing Development Finance
Corporation (HDFC), Indiabulls Housing Finance, Dewan Housing Finance (DHFL) and Can Fin Homes are well placed and it’s unlikely they will get affected in a big way, but for minor compression in net interest margins and return on equity. PNB Housing would need to infuse additional capital as analysts expect the leverage position of the company to cross 14 times in FY22 due to faster consumption of tier-1 capital. Though, LIC Housing, and DHFL are also highly leveraged, their book growth has moderate as compared to PNB Housing. Thus, they may not need to infuse the capital in the near term.
What’s in store?
Analysts believe the move had to be brought about to align HFCs with the wider universe of non-banking finance companies (NBFCs) which cater to a clientele largely not serviced by banks and whose books are seen as risky; and therefore, a capital adequacy ratio of 15 per cent. The mess at the Infrastructure Leasing & Financial Services; and the knockdown effects at HFCs like DHFL were the other factors at play.
NHB has proposed to raise the capital adequacy ratio of HFCs and cap their borrowing at 12 times their net-owned funds (NoF) in a phased manner by March 2022. The capital adequacy ratio will move up in a staggered manner — to 13 per cent by FY20, to 14 per cent by FY21, and 15 per cent by FY2022. Similarly, the proposed cap on borrowings is up to 14 times of NoF by FY20, but taper off later to 13 times by FY21, and 12 times by FY22. The amount of public deposits that deposit-talking HFCs is to be capped at three times of their net worth. Currently, HFCs maintain a floor capital adequacy of not less than 12 per cent, while their borrowings are capped at 16 times their net worth.
Among big HFCs in terms of loan book, LIC Housing and DHFL have the highest leverage of around 11 times and HDFC has lowest level of about 4 times, as per FY18 numbers.
In case of deposits, HDFC and PNB Housing have good chunk of total deposits. As of December 2018, deposits accounted for 30 per cent of total borrowing of HDFC and about 17 per cent in case of PNB Housing. However, as per analysts at Motilal Oswal, the ratio of deposits to NoF stands comfortably at less than two times based on FY19 estimated figures.
Analysts are of the opinion the cap on borrowings for HFCs will certainly deleverage the sector, but it’s important to put forward a structure to prevent a liquidity crunch. “The regulator is saying that you need to keep much higher capital upfront. Whether you do home loans which carry a risk weight of 35 per cent or loans against property with a (risk) weight of 100 per cent,” says Hooda. He adds: “While developers have higher delinquencies, the interest rate charged is also higher (than retail home loans). As a result, one is compensated for the extra credit cost.” HFCs had grabbed market share from the banks for both developers’ and retail home-loans, but the IL&FS fiasco had created a liquidity freeze; it’s unlikely they can do so from banks in a big way going ahead.
The Rs 9.3 trillion HFC industry is growing at a compounded annual growth rate of 25 per cent and has direct impact on sectors such as real estate, cement, steel etc, which generate intensive labour employment. “Both credit and its cost of cost credit will be key primer for overall GDP growth," notes Jaiswal. According to analysts, as the leverage of the HFCs is expected to come down, this would impact their net interest margins by 5-10 basis points even as it sets barriers for the entry of new players.