To bring in clarity over what constitutes ‘housing finance’, address concerns over the conflict of interest arising out of lending and investments in group entities and to filter out the larger players that are systemically important to the housing finance sector, the RBI has proposed notable regulatory changes for housing finance companies (HFCs).
With many of the existing players already meeting the suggested norms, the impact may not be significant. Tighter regulatory rules, may, in fact, increase investor interest in the sector over a period of time. A look at key changes and how they could impact the business and earnings of listed HFCs.
Definition of housing finance
To remove the ambiguity around what constitutes ‘housing finance’ and set limits on HFCs’ exposure to developers and loan against property, the RBI has clearly listed out ‘qualifying assets’. Essentially, loans given against property, for any purpose other than the purchase/construction of a new dwelling units or renovation of an existing dwelling unit, will be treated as non-housing loans. At least 50 per cent of an HFC’s net assets should be housing loansand, within that, at least 75 per cent should be individual housing loans. Hence, while lending to builders for construction of residential dwelling units qualifies as housing finance, it does not fall within the 75 per cent criteria.
How listed players fare
A look at the break-up of loan mix across players suggests that most HFCs satisfy these conditions. CanFin Homes has the highest share of individual housing loans at 90 per cent, while most others are above the 75-per cent-mark. But PNB Housing, which has a lower 58 per cent share of housing loans and Indiabulls Housing (66 per cent), may need to rebalance their portfolios over the coming years. Piramal Enterprises Ltd (PEL), a diversified company with a presence in financial services and pharmaceuticals, has 70 per cent of loans pertaining to wholesale (developer), which will need a major reijg.
Impact
While rebalancing of portfolio may not be required for players that already meet the criteria, a fixed cap on exposure to developer book can add pressure on margins. Spreads or net interest margin on developer lending is much higher than for individual loans. While most players have been reducing their exposure to developer book substantially in recent years owing to the growing risk within the segment, it always offered scope for expanding margins (in healthy market phases). For instance, in the case of HDFC, while the spread on individual loans is about 1.9 per cent, for non-individual loans it is about 3.1 per cent.
For players such as PNB Housing or Piramal Enterprises, a major shift in loan mix can impact profitability significantly. The RBI allowing a staggered shift (60/70/75 per cent over 2022/2023/2024) towards individual housing loans offers ample time for such players to re-jig their models.
Tighter inter-group lending norms
To address concerns over double financing and conflict of interest in lending and investment in group entities, the RBI has brought in tougher rules. Essentially, an HFC can either lend to construction companies within its group or to homebuyers purchasing from the projects of construction companies. If the HFC takes an exposure in its group entities (lending and investment), such exposure cannot be more than 15 per cent of owned fund for a single entity (25 per cent for group).
Impact
In terms of listed players, there could be some impact of this regulation on Indiabulls Housing – Indiabulls Real Estate another group entity is into residential and commercial real estate development.
The rules are, however, silent on the dealing with conflict of interest arising out of other financial entities sponsoring HFCs – Can Fin Homes (Canara Bank holding 30 per cent), PNB Housing Finance (PNB holding 32.6 per cent), LIC Housing Finance (LIC holding 40.3 per cent). We believe that the RBI may have to address such cross holdings and conflict of interest, too, in the near future.
Harmonising other rules
The RBI has also sought to align the liquidity framework and liquidity coverage ratio (LCR) of NBFCs with HFCs and the Income Recognition, Asset Classification and Provisioning (IRACP) norms (aside from securitisation, loan against shares, outsourcing financial services, and no foreclosure charges on floating rate loans).
On the liquidity front, post the IL&FS and DHFL crisis, many HFCs have fine-tuned their ALM profiles (asset liability management) and have sufficient liquidity. Hence, adopting the liquidity framework and LCR norms (in a phased manner) may not have any significant impact. Of course, there could be some marginal impact on margins as HFCs will have to mandatorily set aside funds in non-interest earning cash assets.
On the IRACP front (harmonising over two to three years), given that the current ECL (expected credit loss) approach that HFCs follow requires them to hold higher provisions, moving to the RBI-prescribed asset classification and provisioning norms, based on 90-day past-due concept, will be no issue. Ind AS ECL approach is forward-looking. It follows a three-stage approach, under which provisioning is measured either on ‘12-month ECL’ (performing assets) or ‘Lifetime ECL’ (under-performing or non-performing assets). HFCs (under Ind AS) have to provide for loss, not only based on their historical loss experience, but also by factoring in future expectations.
In the case of public deposits, there is a difference in the ceiling on the quantum of deposits (3 times net owned funds for HFCs against 1.5 times for NBFCs). This is again proposed to be aligned over the next two to three years. Currently, PNB Housing Finance has a deposit base of around ₹16,500 crore, which is about two times its net worth. HDFC has deposits of about ₹1.32 lakh crore, which is 1.5 times its net worth.