NHBs norms will not address credit risk of housing finance company: Moodys

The National Housing Bank's proposed guidelines to tighten the capital adequacy and leverage norms is credit positive for housing finance companies (HFCs) but will not address their issues regarding the key credit risk, funding and liquidity, says a report.

NHB on March 4 proposed to increase the minimum capital adequacy requirement for housing finance companies (HFCs) to 15 percent in phased manner by March 31, 2022 from the present 12 percent.

Global rating agency Moody's in a report Monday said the new guidelines would be credit positive because they would limit housing HFCs' credit growth and cap their maximum exposure to the debt capital markets.

"The new guidelines do not address issues regarding the key credit risk of these companies, funding and liquidity," the report said.

Since September 2018, HFC's asset-liability mismatch has been exacerbated after Infrastructure Leasing & Finance Corporation (IL&FS) defaulted on certain debt market obligations.

Following the default, liquidity in the debt market tightened sharply, leading to increased risk that the HFCs would be unable to refinance maturing obligations, which was reflected by a sharp increase in their commercial paper yields, the report said.

"Although, the HFCs have since September 2018 slowed loan growth to conserve liquidity, the contagion effect of HFCs' liquidity issues can be severe because these companies are a significant borrowers from the banking system," the report said.

Rated banks' exposure to HFCs was between 3-5 percent of total loans as of December 31, 2018.

The report said the NHB's proposed guidelines will benefit HFCs and lenders to the HFCs, particularly commercial banks, because the guidelines will help limit HFCs' credit growth.

Most of the large HFCs already comply with these guidelines, but the report expect that some of the smaller HFCs will slow their loan growth or increase capital and lower their leverage over the next few years.