With the Reserve Bank of India stepping in a proposing draft regulatory changes to housing finance companies (HFC) earlier this week, shares of most of these non-bank finance companies have surged. The draft changes proposed by the central bank, which took over as the regulatory for the sector in 2019, seek to streamline the existing framework whilst defining what a proper housing finance company is. Since the RBI published these guidelines, stocks of PNB housing finance have gained 6%, while those of Avas Financiers have jumped 7%, and those of Repo Home Finance have surged 11%. However, The biggest fish in the sector, HDFC, has only jumped by 0.6%.
Among the most prominent changes in the draft changes is the definition of housing finance. The RBI said that 50% of net assets of HFCs should be towards Housing finance, excluding loan against properties, commercial real estate, and lease rent discount etc. Of these 75% of assets should be towards individual housing loans, the central bank proposed. According to ICICI Securities, do qualify when it comes to these asset requirements but it remains to be seen how much of the loans are towards individual housing loans.
With the proposed change in definition, which is yet to be formally changed, big size HFCs with large builder loan portfolios will have to switch to retail loans. “The companies that have not performed on expected lines with larger builder portfolios, are now being directed by RBI to go more into retail. With this the probability of loans getting delinquent is lesser,” Sanjay Shukla, MD & CEO, Centrum Housing Finance Limited, told Financial Express Online. With a bigger retail portfolio even if loans go bad, the impact would be much less than a builder loan turning into a non-performing asset.
RBI has now, for the first time since taking over the powers to regulate HFCs from the National Housing Bank, proposed to modify the rules governing the sector. “These proposed guidelines are not disruptive to the way listed HFCs are currently operating but it does seek to streamline regulations in a defined manner and reduce the regulatory arbitrage which HFCs have traditionally had over their NBFC counterparts,” analysts at ICICI Securities said in a recent note.
HFCs have seen their stocks jump in the past few days since the RBI proposal went public. For HFCs to comply with the norms it has been proposed that the said asset distribution be undertaken in a phased manner. HFCs will be allowed to achieve this target in a staggered manner — 60% by March 31, 2022, 70% by March 31, 2023, and 75% by March 31, 2024. In an effort to address concerns on double financing, arising by lending to construction firms in the group and also to individuals purchasing flats, RBI has proposed that the HFC may choose to lend to either the construction company or the individual.