RBI draft guidelines will strengthen HFCs, safeguard investor interest

Most listed mortgage lenders already meet the requirements

The Reserve Bank of India’s (RBI’s) new rules for housing finance companies (HFCs) would help strengthen the lenders and safeguard investor interest, say experts. This was needed, they say, especially after the crisis at Dewan Housing Finance Corporation, which had spooked investors.

The proposed rules would also bring clarity to the structure of non-banking housing lenders, but are unlikely to have a material impact on HFCs’ financials since most already meet the criteria.

Among the draft guidelines announced on Wednesday, the central bank has proposed to clearly define "housing finance". The term which would now mean “financing, for purchase/ construction/ reconstruction/ renovation/ repair of residential dwelling unit ...” for a whole host of functions that would include giving loans to companies and government agencies for employee housing finance projects. All other loans would be treated as non-housing loans. Likewise, other rules for NBFCs on liquidity, securitisation, etc would be applicable to HFCs.

According to Prakash Agarwal, head of financial sector ratings at Indian Ratings, “RBI’s draft guidelines on HFCs bring clarity and lot of transparency in terms of their structure. We don’t see any near-term impact on HFCs’ operations as most of them already fulfil these criteria.”

 

 

While HFCs like Piramal Enterprises have a developer-heavy loan book, analysts at Motilal Oswal Securities believe that since it also owns an NBFC within the group, the firm could transfer part of the HFC exposure to the NBFC to meet the qualifying criterion.

The guidelines are also important from the perspective of investors. For example, the classification of systematically important HFCs would improve governance. Sanjay Shukla, managing director and chief executive officer at Centrum Housing Finance, says, “The systematically important classification would mean better monitoring as more data would be collected by the RBI. Also, it would ensure that the HFC is on the right track.”

According to the guidelines, an HFC can either lend to construction companies within the group or to homebuyers of the developer. If it decides to finance the group company, the exposure is capped at 15 per cent of owned funds for the single company and at 25 per cent for the group. Some experts, though, are awaiting more clarity on this as lending to a group company is part of related-party transaction.

Exposure to developers is also capped at 25 per cent of qualifying assets, and could improve the lender’s asset quality.

An executive at a research house said, “The proposal to define the term ‘housing finance’ and setting a threshold of 75 per cent of qualifying assets towards housing loans for individuals shall keep a check on the riskier builder loans in HFCs’ portfolio. This should offer comfort to investors.”