Since most of the big HFCs are already well regulated by the central bank, the proposed categorisation will not make much of a difference.
The Reserve Bank of India (RBI) wants big housing finance companies (HFC) to be categorised as systemically important institutions. Those with asset size of Rs 500 crore and above will be tagged as systemically important ones and those below this threshold as non-systemically important HFCs. This is among the proposed changes the central bank wants to bring in HFC regulations.
The central bank has put up the draft changes on the site for public comments. Similarly, the RBI also wants to ensure its liquidity risk framework, liquidity coverage ratio, securitisation norms that are presently applicable for non-banking finance companies (NBFCs), to be made applicable to HFCs.
Going by the Rs 500 crore asset cut-off size, the proposed category of systemically important HFCs will include all major HFCs including Housing Development Finance Development Corporation (HDFC), PNB Housing Finance, LIC Housing Finance, Can Fin Homes and Sundaram Home Finance.
Since most of the big HFCs are already well regulated by the central bank, the proposed categorisation will not make much of a difference. Since 2019, the RBI has been keeping a close watch on HFCs compared to earlier when NHB was the sole regulator for these companies.
There are 11 HFCs in India which have been given permission to accept public deposits and six others which need permission from National Housing Bank (NHB) before accepting deposits. Further, there are 83 HFCs which do not have permission to accept public deposits.
Another major proposal in the RBI draft is the qualifying asset criteria. Going by this, an HFC to have at least 50 percent of their total assets in housing finance and at least 75 percent of the qualifying assets as housing finance for individuals. HFCs which do not fulfil the above criteria will be treated as NBFC – Investment and Credit Companies (NBFC-ICCs) and will be required to approach RBI for conversion of their Certificate of Registration from HFCs to NBFC-ICC, the RBI said. This requirement will push HFCs to cut down their wholesale loan portfolios and focus more towards individual loans.
To give a perspective, HDFC's individual loans comprise 76 percent of its Assets Under Management as at March 31, 2020. But, that’s not the case with many smaller ones where wholesale loans are a sizeable chunk of the loan book.
In order to address concerns on double financing due to lending to construction companies in the group and also to individuals purchasing flats from the latter, the HFC concerned may choose to lend only at one level, the RBI has said.
"The HFC can either undertake an exposure on the group company in real estate business OR lend to retail individual home buyers in the projects of group entities, but not do both," RBI said.
If the HFC decides to take any exposure in its group entities (lending and investment) directly or indirectly, such exposure cannot be more than 15 percent of owned fund for a single entity in the group and 25 percent of owned fund for all such group entities, the central bank said.
This is significant since many HFCs have, in the past, engaged in lending to the real estate developer and individuals purchasing property from the same developer creating concentration of high risk. If the project fails, the HFC will take a bigger hit.
The RBI also said the minimum CRAR prescribed for HFCs currently is 12 percent, which will be progressively increased to 14 percent by March 31, 2021 and to 15 percent by March 31, 2022.Follow our coverage of the coronavirus crisis here