Suffocating HFCs: The unintended consequences of RBI's guidelines

Housing finance companies (HFCs) in India, especially those accepting fixed deposits, will be under severe pressure due to the recent guidelines issued by the Reserve Bank of India. The RBI aims to tighten the operations of HFCs and treat them on par with non-banking finance companies (NBFCs), but this may suffocate the HFCs.

Though the intention of the RBI is to harmonise the rules and regulations of HFCs and NBFCs, what is lost sight of is the ethos and purpose for which HFCs were established: to provide long-term housing finance to the needy and to provide a shelter of their own.

HFCs have evolved from 1987 (though HDFC was launched in 1978), with the United Nations declaring 1987 the ‘International year of shelter for the homeless’. Since the establishment of the National Housing Bank (NHB) in 1988, as the apex institution by the Government of India/RBI, NHB has dedicated itself to promoting, regulating, supervising, and refinancing HFCs in India. In a few HFCs, NHB had equity participation too. But, in the 2019 budget, the NHB Act was amended, and the regulatory functions were conferred on the RBI for exercising better control and supervision over all the financial entities and intermediaries—banks, NBFCs, HFCs, and Micro finance Institutions (MFIs). This seems to be the first blow that diluted the role and powers of NHB. Subsequently, RBI has brought in a host of regulations, including ‘provisioning norms’ to control and treat HFCs as ‘another vertical’ to be treated under the regulatory framework akin to NBFCs.

The latest blow to HFCs are the following guidelines recently issued by the NHB:

A few well-managed HFCs, such as Can Fin Homes Ltd, ICICI Home Finance, LIC Housing Finance, Cent Bank Housing Finance Ltd, and PNB Housing, focused on providing housing finance in general and affordable housing in particular, are also permitted to accept fixed deposits by the NHB.

Other HFCs will have to take ‘express permission’ from the NHB to accept public deposits year on year after complying with stipulated norms.

The new guidelines now have the undesirable condition of reducing the tenure of the fixed deposits, which housing finance companies can accept from the public, to five years from the existing 10 years. This will likely prove suicidal for HFCs.

HFCs are specialised institutions and are different from NBFCs, which also offer gold loans, vehicles and personal loans. There are several NBFCs that provide unsecured loans as well, for which the tightening of norms by the RBI are justified and need to be monitored. However, all entities cannot be treated with the same clutch of regulations.

HFCs typically lend for a term of 20–30 years against mortgages of properties (asset-backed lending). The loan quantum ranges anywhere from Rs 1 lakh to Rs 10 crore. If the tenure of FD is capped and clipped for five years, there will be a serious asset-liability mismatch (ALM), which will in turn affect the cost of funds and net interest margins (NIMs) of HFCs. The flow of long-term savings of households to HFCs, which normally offer higher interest rates on fixed deposits, will get diverted to other risky avenues such as the stock market or equities. Housing finance companies will be forced to borrow from banks, which will be costlier, thus affecting their profitability.

To add to their woes, the RBI has lowered the ceiling on the quantum of public deposits from the existing three times of ‘net owned funds’ (NOF) to 1.5 times of NOF— reduce by 50%. The candle is being burned from both ends.

Further, deposit-taking HFCs will henceforth have to obtain a minimum ‘investment grade’ rating (from AAA to BBB-) at least once a year from rating agencies such as CARE, ICRA, and FITCH. HFCs that do not fulfil the ‘rating’ criteria will not be allowed to take fresh deposits and also cannot renew the FDs that mature.

Another measure that may not work in HFCs’ favour is the condition for
deposit-taking housing finance companies
to maintain 15% of deposits outstanding in ‘liquid assets’ (cash in bank, investment in bonds or government securities)
from the existing 13%. The stipulation
can be met in two phases: 14% by January 1, 2025, and 15% by June 2025,
respectively.

HFCs are already struggling with high cost of funds when compared to banks. The interest rates charged by HFCs are always higher than the banks and hence has bearing on asset quality, non-performing assets, and profitability.

The charm of Housing finance companies, which caters to the home loan requirements, providing shelter to the needy in Tiers 2 and 3 cities, and lending to individuals in the unorganised sector where income assessment is a challenge, appears to be on the wane.

GRUH Finance was taken over by Bandhan Bank. The biggest merger of the largest mortgage lender, HDFC, with HDFC Bank was completed in July 2023. We may witness such mergers or offloading of bank promoters’ stakes in their housing finance subsidiaries.

The RBI should reconsider these guidelines to facilitate the growth of Housing finance companies and promote affordable housing.

(The writer is a former banker)