Most of the discussion around the Union Budget has happened around the hike in surcharge for the ultra high networth individuals and foreign portfolio investors. I am writing about a much less noticed and talked about item – moving the regulatory baton for housing finance companies (HFCs) from National Housing bank (NHB) to the Reserve Bank of India (RBI).
NHB as a separate regulator for HFCs was never really a good idea. It doubled up as a financier to the HFCs as well as was their regulator – which is a clear conflict of interest. Secondly, NHB just did not have the size, status or heft to be able to regulate large HFC’s such as a Housing Development Finance Corporation, which are several times NHB’s size. So the move to combine the entire regulatory regime in the hands of the RBI is a good move.
Home loans tend to be provided for long tenures such as 15-20 years and even though most home loans are paid off early, most HFCs will run a major timing mismatch between their lending (home loan tenures) and their own borrowing (which tends to be far shorter term in nature). Most of the time the HFCs are able to roll over their shorter term borrowings, but in current times when the lenders are risk averse, HFCs have a serious problem in their hands. Even where the HFC lend for the short term, they are basically loans for the real estate developers which is a risky bet especially in the current environment where most developers are under severe stress. Provisioning requirements for such type of loans to developers are likely to be made stricter by the RBI and in line with those prevailing for other NBFCs.
The RBI is currently in the process of overhauling the entire risk management eco-system for NBFCs and it is imperative that a most important segment such as the HFCs are not left out of such an overhaul. This is also important considering the large exposure that the banking industry has on the HFCs. The integration of regulatory oversight with the RBI is good as a single regulator will be responsible for entities in the financial system.
Can home loan borrowers expect to benefit from the change in regulators? The answer is a qualified yes. In the long run, (meaning after the crisis in non-banking financial companies has abated and the overhang of non-performing assets has bottomed out) the consumer facing regulations will need to be equated between the banks and the HFCs and also improved for both set of lenders. The long standing proposal to link home loan rates to an external benchmark will eventually have to be rolled out at some point of time and there will be very little justification for allowing any relaxation to the HFC on this score after it has been rolled out for the banks. The minimum down payment requirements are also likely to be similar between the banks and the HFCs with some leeway being provided to the HFC.
All in all, while the final retail home loan borrowers are unlikely to see any significant change in the immediate future, the integration of the regulation function between the banks and the HFCs will prove to be beneficial for the industry and the borrowers in the long run.
The writer is a Sebi-registered investment advisor