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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 made some amendments to the capital adequacy ratio (CAR) and the liability raising norms for housing finance companies (HFCs). 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 the CAR will increase from 12% now (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, which have to maintain a 15% CAR. More importantly, the minimum Tier I ratio has been increased to 10%, effective FY20.
• Likewise, the cap on leverage (total borrowings/net owned funds), which is currently at 16x, will be brought down to 12x by 31st Mar'22 in a staggered manner.
• In addition, there will be a ceiling on public deposits at 3x of net owned funds of the HFCs, as against 5x currently.
• According to 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 a CAR of 15%+. HFCs such as LICHF, which are slightly short of 15% CAR, might raise some Tier II capital to meet the norms.
• Regardless of the revised norms, PNBHF is likely to raise equity capital over the next 12-24 months, in our view. This is because its leverage (10x currently) is approaching the upper limit that most credit rating agencies are comfortable with.