HFCs to face higher provisioning

No plan to introduce base rate model for home financing companies, says National Housing Bank

Housing finance companies (HFCs) are set to face higher provisioning norms, as the National Housing Bank (NHB), the regulator for housing finance companies, plans to introduce standard asset provisioning of 0.4 per cent on retail advances.

Home financing firms would now have to set aside additional capital for their performing retail home loan portfolio.

Though banks are required to make standard provisioning of 0.4 per cent on home loans, HFCs have to make the additional provisioning on their non-retail portfolio, which largely comprises project loans.

“As a proactive measure, we are planning to introduce this additional provisioning norm for HFCs. Taking into account the current high interest scenario, this would act as an extra cushion for HFCs,” R V Verma, chairman and managing director, NHB, told Business Standard.

HFCs were exempted from the extra provisioning norm in a bid to encourage them to chanellise more advances towards retail, Verma said. HFCs account for nearly 30 per cent of the home loan market in India.

There are chances that delinquencies may raise the retail portfolio, as rising interest rates continue to pose problems for borrowers. “This prudential measure would provide adequate cover to HFCs,” Verma said.

Housing Development Finance Corp (HDFC), India's largest home financing company, is unlikely to be hit due to the move, since the financier makes higher provisioning than the regulatory requirement. During 2010-11, HDFC had made total provisions of Rs 1,124 crore, compared with the regulatory requirement of Rs 814 crore. The new provisioning norm would mean an additional burden of Rs 120 crore on HDFC, said a company spokesperson.

NHB clarified it was not planning to introduce the base rate system for HFCs, as their liability structure is different from that of banks. “Since HFCs are dependent on the market for most of their borrowing requirements, any fluctuation in interest rates impacts their costs. So the prime lending rate system is okay,” Verma said.

He said there was slackness in demand for housing loans and HFCs are faced with margin pressure. “With demand slowing and the cost of funds rising, HFCs would find it hard to maintain their interest margins,” he said, adding, NHB had decided to raise the initial capital requirement for starting an HFC from Rs 2 crore to Rs 10 crore.