The guidelines are unlikely to have any significant impact for most HFCs in the near term, as they already maintain the kind of capital adequacy ratio (CAR) that NHB has mandated. “Most of them already maintain CAR of more than 15 per cent currently,” said Motilal Oswal Securities.
However, those which already have high leverage and lower returns on assets (RoA) may feel the pressure on return on equity (RoE) due to lower leverage. “Given the higher capital requirement and lower leverage, sustainable RoEs of HFCs would be diluted,” brokerage IIFL said in a report.
NHB has proposed amendments to capital adequacy ratio (CAR) and some other norms to strengthen balance sheets, reduce leverage and cap the extent to which HFCs can raise public deposits.
As per the revised guidelines proposed, the minimum threshold for CAR will increase from 12 per cent currently to 15 per cent by March 31, 2022 in a phased manner. There will also be a cap on leverage and public deposits.
This will put HFCs at par with other NBFCs, which are already required to maintain 15 per cent CAR.
“The impact would be higher for HFCs with already high leverage and lower RoA – like LIC Housing Finance and PNB Housing Finance. These companies would be required to raise capital and would end up with lower sustainable RoE,” IIFL said.
Only those HFCs which already have high RoAs and high capitalisation, such as HDFC, Repco Home Finance and Gruh Finance, would not have any significant impact.
India’s non-banking financial companies (NBFCs) and housing finance companies (HFCs) have been under pressure ever since the IL&FS fiasco in September last year.
The sector has been reeling under acute liquidity crisis, despite several steps taken by the government to normalise the state of affairs.
“In the long run, HFCs with higher RoAs would command premium valuations versus HFCs focused on growth,” IIFL said.
Some analysts think the sector may see consolidation as the new norms will make it tough to raise capital. “It will be very difficult for HFCs to raise capital as of now and it will lead to more consolidation in HFC,” said Sameer Kalra, Founder of Target Investing.
“If another rate cut happens in April, the commercial paper market should become the flavour again,” Kalra said.
Industry watchers say while norms and regulations are important to maintain a healthy system, HFCs need much more in addition to these steps to avoid a repeat of the IL&FS kind of defaults.
Liquidity crunch and poor loan growth amid lower demand are shaking up the pillars of the sector. “If loan growth takes a knock, the valuations they are trading at will become expensive,” Kalra pointed out.
“The main challenge for HFCs is to find loan growth because demand growth is not there. Even if you have Rs 10,000 crore in books, you do not have people to push that Rs 10,000 crore to. As long as demand remains sluggish, the challenge remains,” Kalra said.