To improve solvency of housing finance companies, the regulator National Housing Bank (NHB) has proposed to increase capital adequacy ratio to 15 per cent in a phased manner.
The proposed norms are being issued in the wake of liquidity problem being faced by housing finance companies (HFCs) after IL&FS crisis.
NBFC sector including HFCs came under pressure after series of default by group companies of IL&FS beginning September last year.
Keeping in view the long term nature of the housing finance business model and requirement of long term capital, the following proposal relating to progressive increase in the minimum capital adequacy requirement for HFCs, from the present stipulation of 12 per cent in phased manner to 15 per cent by March 31, 2022, NHB said in the draft guidelines.
As per the roadmap, HFCs have to increase minimum Capital Adequacy Ratio (CAR) to 13 per cent by March 31 next year and 14 per cent by March 31, 2021.
CAR is one of the important parameters from the point of view of solvency of HFCs and their protection from untoward events which arise as a result of liquidity risk as well as the credit risk that the HFCs are exposed to in the normal course of their business, it said.
Besides, the regulator has proposed to bring down the public deposit mobilised by them to 12 times by March 2022 in a gradual manner from existing 16 times of the Net Owned Fund (NOF).
In modification of the same, it is proposed to implement graded reduction in the limit on the overall borrowings of HFCs, to 14 times of NOF of the HFC by March 31, 2020 and 13 times of March 31, 2021, it said.
"NOF for the purpose of determination of the above borrowing limits shall be with reference to the NOF as per the audited accounts as on March 31 of the previous year. Infusion of capital (eligible for inclusion under NOF as per NHB regulations) after such balance sheet may, however, be taken into account for determining the limits," it said.
NHB has invited comments from all stakeholders on the issue by March 31, 2019.
According to ICRA NHBs proposed amendments in Capital Adequacy, deposit mobilization and leverage norms for Housing finance companies are positive from a risk perspective.
Most of the HFCs would be able to meet the revised norms on CRAR, as most of the HFCs which are nearing 15-16 per cent CRAR and would have adequate cushion to raise Tier II capital and shore up the CRAR, if required.
Also, the capital adequacy for HFCs is supported by the lower risk weights on smaller ticket size home loans which is the growth area for most HFCs, ICRA said.
"As per ICRA's estimates, seven HFCs had gearing levels of over 10 times as on March 31, 2018, which is lower than the proposed ceiling limits. However, well rated HFCs are expected to maintain cushion over and above the regulatory limits and thus need to raise external capital could remain high for some of the HFCs if the growth momentum was to continue," ICRA said.
Commenting on the proposed guidelines, Ravindra Sudhalkar CEO, Reliance Home Finance said lowering leverage levels by HFCs is a good move that will help control the over speeding sector.
But regulators need to make easy availability of capital for HFCs with a strong balance sheet, as liquidity crunch is acting as a huge roadblock to the overall growth of the housing market, he said.
Going forward availability of capital will play a crucial role particularly if we have to achieve the government goal of housing for all by 2022, he added.
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