The government's move to treat housing finance companies (HFCs) as one of the categories of NBFCs will increase funding and compliance costs for HFCs, shrinking the entire mortgage industry at a time when it is already struggling with liquidity issues.
RBI issued a directive on Tuesday, saying that HFCs will be treated as NBFCs for regulatory purposes and will come under its direct oversight. The directive follows amendment to the National Housing Bank Act, 1987, conferring certain powers for regulation of HFCs with RBI.
Experts, however, say the move may make the going tough for HFCs. Currently, systemically important NBFCs have to follow prudential norms on cash reserve ratio, gearing ratio and safety capital norms as per RBI regulations. These measures were so far not applicable to HFCs, which were regulated by the National Housing Bank (NHB).
"The move will constrain the environment at a time when there is already a dearth of capital for mortgage finance. It will shrink the mortgage industry further due to lack to availability of capital for the sector," Amit Goenka, MD and CEO at Nisus Finance said.
Now, HFCs will have to keep aside funds for safety margin in contrast to earlier rules, which allowed them to lend the entire amount raised. "So, their cost of capital will go up while the amount of money that can be disbursed will go down," he added.
Moreover, NBFCs are allowed a gearing of only 6.5 times of tier-I capital or core capital while HFCs could take 10 times gearing. This will also limit the amount of money that can be raised, again impairing their lending capacity. More importantly, says Goenka, heavily geared HFCs will be forced to raise their equity levels.
Finance Minister Nirmala Sitharaman in her Budget speech announced that NHB would cease to be a regulator for HFCs, which will come directly under RBI. "HFCs will henceforth be treated as one of the categories of Non-Banking Financial Companies (NBFCs) for regulatory purposes. Reserve Bank will carry out a review of the extant regulatory framework applicable to the HFCs and come out with revised regulations in due course," RBI said in a release.
In the meantime, HFCs shall continue to comply with the directions and instructions issued by the National Housing Bank (NHB) till the Reserve Bank issues a revised framework, it added.
Goenka also said NHB was not only a regulator for the sector, but also a facilitator. NHB works with other financial institutions to raise funds and make it available for HFCs besides conducting research and studies. NHB also extended refinancing facility through the automated route external commercial borrowing to HFCs. However, RBI is not a facilitator and will not perform this function.
Sanjay Chaturvedi, CEO, Shubham Housing Finance said unification of regulations for NBFCs and HFCs will remove the arbitrage arising from differing guidelines as banks were treating HFCs at par with NBFCs while lending. "This coupled with the government's move to provide first loss guarantee and also bank's loans being counted as priority sector lending where banks lend to HFCs for on- lending to individual borrowers up to Rs 20 lakh should be hugely positive," he said.
"One of the issues faced by the industry is that banks continue to lend only to the largest NBFCs and the smaller companies are starved for funds. This should now get addressed," he added.