Mortgage norms: Tightened or relaxed?

After taking over as the regulator of the mortgage market in August 2019, India’s central bank last week proposed to define what is home finance and change the rules for the business.

The provocation for this is the crisis that a few large housing finance companies (HFCs) faced in the recent past. Like many other non-banking financial companies (NBFCs), they borrowed short-term cheap money from the market to lend long and faced the music when the interest rate cycle changed in 2018.

The compounded annual growth rate of NBFCs in the five years between 2013 and 2018 was 17 per cent versus 9.4 per cent growth of the banking system; the HFCs grew even faster — 20 per cent. Since then, the HFCs’ growth has come down to around 13 per cent annually. There were 72 HFCs in 2015; since then the number has grown to nearly 100.

As of December 2019, the size of the Indian housing finance market was Rs 20.7 trillion, including finance to commercial real estates and builders. The share of a few large banks, which have been aggressively chasing home buyers, is roughly two-thirds of this. One-third of this market belongs to the HFCs and NBFCs and about 10 of them have 90 per cent share of the pie.

The Reserve Bank of India (RBI) has placed a draft of the proposed new norms on its website, seeking comments from the public before finalising the guidelines. Let’s treat this column as a feedback to the regulator.

Any loan given to individuals or group of individuals and cooperative societies for the purchase of new houses and plots, and the construction, reconstruction, renovation and repairs of houses is being defined as housing finance. Such loans can be taken by state housing boards, corporations and government agencies for their employees, for the development of slums as well as building centres for education, health and socio-cultural activities. Finally, lending to builders for the construction of residential dwelling units is also a housing loan.

To be called an HFC, an entity must have at least 50 per cent of such loans in its portfolio; one-third or 75 per cent of this bucket should be individual housing loans. Here is the catch. One-third of 50 per cent loans or 37.5 per cent of the overall loan book of an HFC must consist of individual loans. Isn’t that too little a portion?

This means, an HFC can have as much as 62.5 per cent exposure to the real estate developers and their most favourite product, LAP or loan against properties. Instead of tightening the norms, this draft actually plans to relax the home finance norms.

Under the current National Housing Bank (NHB) guidelines, an HBC can get refinance from the erstwhile mortgage regulator (now it is just the supervisor) if it has given 51 per cent of overall loans to individual home buyers. Once the new norm is in place, an HFC will be able to get the NHB refinance with 37.5 per cent exposure to individual loans.

NHB refinance is critical for an HFC as the money is cheap. For instance, refinance for affordable housing —which is 40 per cent of the NHB’s refinance pool — is given at 3.5-4 per cent. The rest is currently given at around 7-8 per cent (depending on the rating of HFCs) for three to seven years. Supported by refinance, the big HFCs now can give more loans to the builders — the root of the problem from which the industry has not yet been able to come out.

How can this be sorted out? The RBI can raise the limit of exposure to housing loans from the proposed 50 per cent to 75 per cent and keep a sub-limit for retail home loans in such a way that all HFCs must have at least 51 per cent retail loans to be classified as an HFC (instead of 37.5 per cent).

Many would find even this floor low. But one must consider the fact that HFCs compete with the banks on the home loan turf. And this makes it difficult for them to run the home loan business profitably. Banks have access to public deposits and hence their cost of money is lower than that of the HFCs.

So, there must be other avenues for the HFCs to earn better returns. One way of allowing them to do that with a safety value in place is putting a cap on their loans to builders and LAP instead of keeping a floor for retail home loans. For instance, they can have 25 per cent exposure to such products to compensate for the thin margin for retail home loans.

Higher capital allocation for non-retail loans can also be considered to discourage the HFCs to go wholesale whole hog.

The best part of the proposal is the curb on “double financing”. Some of the HFCs have real estate development outfits within the group; they smartly arbitrage between retail home buyers and their construction companies. Typically, the home buyers put in a small portion of the cost of purchase initially and pay up on possession. The HFC gives money to its group construction company but the fund is shown as loans to the home buyers. In other words, real estate loans are given in the garb of retail loans, sourcing money cheap from the NHB refinance window. This loophole is being plugged.

The RBI has missed out on one NHB norm. It says if there is a delay in project completion on account of factors “beyond the control” of the implementing agency, the loans can be rescheduled with the approval of the board of the HFC and such loans are to be treated as standard assets. There is rampant misuse of this norm by many HFCs.

In September 2018, NHB penalised Dewan Housing Finance Ltd a princely sum of Rs 65,000 for classifying a bad loan good without following proper procedure. What is beyond the control of the implementing agency? Will the RBI define that? And if indeed the HFCs are allowed to do so, shouldn’t they disclose such loan recast to all stakeholders, including the regulators?


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