Gagan Banga of Indiabulls Housing Finance told CNBC-TV18 he expected roughly Rs 60,000 crore of additional funds to come the way of the top rated housing finance companies from this move.
Housing finance companies are in focus today as the Securities and Exchange Board of India (Sebi) allowed additional 5 percent of mutual fund investment into bonds of housing finance companies.
Commenting on the development, Gagan Banga, Vice Chairman and of Indiabulls Housing Finance told CNBC-TV18 he expected roughly Rs 60,000 crore of additional funds to come the way of the top rated housing finance companies from this move.
As mutual funds tend to invest only in the top-rated companies, which are just a handful right now, this Rs 60,000 crore could go to only three or four players, he said.
While the move could lead costs to drop by 25 basis points, Banga does not expect it to immediately trigger a reduction for borrowers as there has already been a significant drop in rates in January. However, over a longer period this will prove beneficial, he says.
Below is the verbatim transcript of Gagan Banga’s interview to Prashant Nair & Reema Tendulkar on CNBC-TV18.
Reema: You want to react to it, how does it change the funding for a company like Indiabulls Housing? Do you expect the cost of borrowings to come down because of this?
A: Yes, so this is essentially an extension of what the government has being trying to do and as a consequence the costs of home loans for borrowers has anyways dropped to levels thanks to a) the overall reduction in interest rates in the market and also the combination of tax breaks given as well as the Pradhan Mantri Awas Yojana. The home loans yields are at an effective level of 2.50 percent and with this a distance financing come in the way of housing finance companies my sense is that cost would overall drop by 25 basis points. It may not immediately trigger a reduction for borrowers. The reduction has been pretty sharp in the month of January, but yes for an extended period of time the borrowers can be assured of the fact that the home loan EMI cheque would continue to be lower than the rent cheque that they had being paying in the past.
Prashant: In this specific case could you tell us how much could mutual fund invest earlier and how much does this free up in that sense, potentially?
A: So, mutual funds in their debt schemes have roughly Rs 12 lakh crore of assets under management and non bank finance companies or housing finance companies initially invest 25 percent and then there was forbearance given for 5 percent for housing finance companies. In August of last year that was extended by 5 percent and then again yesterday it has been extended by another 5 percent. 5 percent in today’s context would mean roughly Rs 60,000 crore of additional funds would come the way of the top rated housing finance companies. Mutual funds tend to invest only in the top rated companies and there are just a handful of AAA rated housing companies, so this Rs 60,000 crore would go the way of three or four players only.
Reema: Earlier prior to this 5 percent increase the limit for this sector non banking financial companies (NBFCs) and housing finance company (HFCs) was 35 percent?
A: That is right.
Reema: How much of that was utilised?
A: My sense is that that was utilised to the tune of almost all of 35 percent.
Reema: That makes you quite confident that they would increase it by the other 5 percent which could give you liquidity of that Rs 60,000 crore?
A: It would be additionally a boost on existing assets under management (AUM) and as you are aware that AUMs for mutual funds have been on the rise, so that is an incremental short but right now immediately there is roughly Rs 60,000 crore which is available for immediate investments in bonds of housing finance companies.
Prashant: For Indiabulls Housing Finance, how does the funding dependant stack up really?
A: For the last couple of years, ever since our upgrade to AAA we have been incrementally almost solely dependent on bonds as the major source of finance. This year we have raised roughly Rs 27,000 crore of bonds. My sense is that on the incremental bonds that we raise there are going to be two benefits, a) we should be able to attract at least 15-20 percent of this additional Rs 60,000 crore which has been made available and that should also drive down incremental yields by roughly 20 basis points at least. So, that is the sense that one has got in the short period that this forbearance has been out. Overall my sense is that it is Rs 10,000- 15,000 crore short-term liquidity infusion which happens at a cost break of roughly 20 basis points. Which then further impacts overall bond yields and therefore all incremental financing comes down by roughly 20 basis points.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.