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IL&FS crisis fallout: NHB proposes higher capital adequacy for housing finance companies

FE Bureau

Amid growing concerns about solvency as well as asset-liability mismatch in the shadow banking space following the IL&FS crisis, the National Housing Bank (NHB) has proposed to gradually raise the capital adequacy requirement of housing finance companies (HFCs) to 15% by March 2022 from the current 12%.
In its proposed amendments to regulations, reviewed by FE, the housing finance regulator has also decided to reduce the limit of borrowings by HFCs to 12 times of their net-owned funds (NOF) by March 2022 from 16 times now.

Analysts said the proposal on steady improvement in solvency parameters, such as capital adequacy, will ensure HFCs remain in fine shape and their capacity to absorb shock rises.

Similarly, tightening their borrowing limit will basically prevent HFCs from getting into the unavoidable debt trap where they will ultimately default on their payment obligation, just like some of the IL&FS entities. The proposal to implement the changes fully over a three-year period is aimed at giving HFCs enough time to get their act together and stay afloat, at a time when they are already facing liquidity constraints.

As per the proposal, the capital adequacy has to be raised by one percentage point each in the next three years through March 2022. Similarly, the borrowing limit will have to be cut to 14 times of HFCs NOF by March 2020, 13 times by March 2021 and 12 times by March 2022.

Further, it is also proposed to stipulate that the ceiling on public deposits for the applicable HFCs be capped at three times of the NOF.
“Being financial entities, HFCs are exposed to risks arising out of counterparty failures, funding risks and risks pertaining to liquidity and solvency, as any other financial sector player. There is thus a felt need for a review of the regulatory framework of HFCs over a few aspects which are detailed below…,” the NHB 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 31st of the previous year,” the NHB said. The regulator has sought stakeholder comments by March 31.

Liquidity also remains tight across the banking system, a major source of financing for NBFCs including HFCs. According to a CARE Ratings report, the banking system liquidity deficit tightened further in the week through February 22. The average liquidity deficit for the week at Rs 1,28,851 crore was at a 8-week high and was Rs 42,136 crore more than the average liquidity deficit of the previous week. Another CARE Ratings report suggested that the share of funds deployed in commercial papers and corporate bonds of NBFCs has remained under pressure and dropped to 8.2% and 8.3%, respectively, in January from 8.5% and 8.7% in December.

In October last year, just after the IL&FS crisis flared up and concerns about the repayment ability of some HFCs, including DHFL and Indiabulls, started to depress market sentiments, the NHB had raised its refinancing target for 2018-19 by 25% to Rs 30,000 crore from the initial aim of Rs 24,000 crore. Later, the target was again raised to Rs 50,000 crore after the RBI approval. As of February 22, it disbursed Rs 16,636 crore.

A senior finance ministry official recently said commercial papers and non-convertible debentures worth Rs 2.7 lakh crore of NBFCs, including HFCs, are estimated to be due for redemption in the last quarter of this fiscal. Of this, rollover/redemption is expected to be around Rs 1-1.2 lakh crore in March alone.