New NHB norms don't address funding and liquidity issues of HFCs: Moody's

The housing market regulator has proposed to raise capital adequacy ratio for HFCs from 12% to 15% by March 2022 and pare their total borrowings to 12 times their net worth from 16 times

New guidelines proposed by the National Housing Bank (NHB) to tighten capital adequacy and leveraging of housing finance companies (HFCs) do not address their funding and liquidity challenges after IL&FS group defaulted on its debt obligations, thus exposing the asset–liability mismatch of these companies, said Moody’s.

According to the global rating agency, “The new guidelines would be credit positive because they would limit HFCs' credit growth and cap their maximum exposure to the debt capital markets. However, the new guidelines do not address issues regarding the key credit risk of these companies, funding and liquidity”.

The housing market regulator has proposed to raise the capital adequacy ratio for HFCs from 12 per cent to 15 per cent by March 2022 and reduce their overall borrowings to 12 times their net worth from 16 times, as it felt the need to review its regulatory framework to counter the solvency and over-leveraging risks these companies face.

Moreover, the maximum public deposit HFCs can hold has been capped at three times their net worth.

“Although most of the large HFCs already comply with these guidelines, we expect that some of the smaller HFCs will slow their loan growth or increase capital and lower their leverage over the next few years”, said Moody’s.

The use of short-term funding by HFCs to fund long-dated assets, keeping very little back-up liquidity,  has been on the rise. After the IL&FS fiasco, HFCs are facing liquidity constraints in India’s debt market as fear of failure to refinance their debt obligations persists. This is reflected by a sharp increase in their commercial paper yields.

The liquidity freeze situation has forced HFCs to take a very conservative approach and slow down their credit delivery to conserve liquidity. Loan disbursements by Dewan Housing Finance Limited (DHFL) declined 95 per cent in the third quarter of FY19, while those of India Bulls Housing Finance were down 69 per cent.  

PNB Housing Finance Lts saw only a one per cent increase in disbursement while LIC Housing Finance and HDFC saw a 13 per cent and 15 increase in loan disbursement figures, respectively.

Industry experts believe this move by the housing regulator has been in the reckoning for a few years now, but the liquidity crisis in the immediate aftermath of IL&FS groups defaults in the second quarter revealed weakness in some HFCs profile and this hastened the efforts to initiate revision in norms. This is also being done to bring NBFCs and HFCs on the same page when it comes to CAR.