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MOSL: FINANCIALS – HOUSING FINANCE-Increasing capital requirements for HFCs Minimum capital adequacy ratio to be increased to 15% by FY22

Financials – Housing Finance: Increasing capital requirements for HFCs; Minimum capital adequacy ratio to be increased to 15% by FY22

 

• The National Housing Bank (NHB) has proposed some amendments to capital adequacy ratio (CAR) and other norms for housing finance companies (HFCs), seeking comments/feedback for the same by 31st Mar'19.
• The regulator plans to strengthen the balance sheets of HFCs by increasing the minimum capital adequacy ratio, reducing leverage and capping the extent to which HFCs can raise public deposits.
• According to the revised guidelines, the minimum threshold of CAR will increase from 12% currently (minimum Tier I of 6%) to 15% by 31st Mar'22 - uniformly over the next three years. Hence, by FY22, HFCs will be at par with other NBFCs, who have to maintain 15% CAR. However, the mix of Tier I and Tier II capital within this 15% has not been specified.
• Likewise, the cap on leverage (total borrowings/net owned funds), which currently stands at 16x will be brought down to 12x by 31st Mar'22. In addition, there will be a ceiling on public deposits at 3x the net owned funds of the HFC.
• As per our analysis, these amendments are unlikely to have any meaningful impact on any of our coverage companies. All HFCs under our coverage already have 10%+ Tier I capital. In addition, most of them maintain CAR of 15%+ currently. HFCs such as LICHF, who are slightly short of 15% CAR, might raise some Tier II capital to meet the norms.
• Regardless of the revised norms, we expect PNBHF to raise equity capital over the next 12-24 months. This is because its leverage (10x currently) is approaching the upper limit that most credit rating agencies are comfortable with.