Govt mortgage vehicles on anvil

The committee on financial sector assessment has proposed the setting up of one or two government-sponsored secondary mortgage vehicles (with private management and ownership participation) such as Fannie Mae and Freddie Mac in the US to develop a healthy mortgage market.

However, the committee also said that in view of the prevailing market conditions and fiscal implications, it might not be the right moment to set up such institutions.

“Fannie Mae and Freddie Mac, which enjoyed an implicit government guarantee, have recently been taken over by the US Treasury. In light of these developments, as also the observations of the Panel, it felt that this is not an opportune time to bring into being these kinds of vehicles. However, the idea needs to be studied carefully in the interests of developing the housing finance market in the medium and long term,” the report by the committee on financial sector assessment (CFSA) said.

The committee also recommended that builders and construction companies should not be permitted to access housing finance in their names.

The committee also advocated for strengthening the financial position of the National Housing Bank (NHB) to address the issue of liquidity of housing finance companies (HFCs) and also recommended new measures pertaining to acquisitions and provisioning requirements of the HFCs.

Lack of access to low-cost funds and higher regulatory costs owing to additional reporting requirements might force the deposit taking non-banking finance companies (NBFCs) to go out of business or merge with banks.

“A level-playing field between banks and NBFCs may not be practical and that, over the medium-term may become increasingly difficult for deposit-taking NBFCs to compete with banks, causing these entities to become unviable or be merged with banks,” the report said.

It called for close monitoring of the borrowing pattern of NBFCs as it accounted for about two-third of their funding requirements.

“Unsecured borrowings comprise their single largest source of funds (36.8 per cent), which includes a significant amount of borrowings from banks/FIs. Thus, they have a systemic linkage and need to be monitored closely to ensure that they do not pose any risk to the system,” the report said.

According to the report, an active corporate bond market would address the funding requirement of NBFCs as concentration of funding had own risks.

“To the extent that they rely on bank financing, there is an indirect exposure for depositors. On the one hand, the concentration of funding has risks and, on the other, the caps on bank lending to NBFCs will constrain their growth,” the report said.

The report said that both NBFCs and HFCs are compliant in areas relating to capital adequacy, credit risk problem assets, large exposures, supervisory approach, supervisory techniques and supervisory reporting.