Housing finance firms may have to make extra provisions

National Housing Bank (NHB), the regulator for housing finance companies (HFCs), is planning to follow the central bank’s line on home loans.

Besides higher provisioning for teaser rates, it plans to cap the loan-to-value (LTV) ratio of home loans at 80 per cent and raise risk weights on home loans above Rs 75 lakh. The decisions are expected within the next fortnight. “Our discussions with the Reserve Bank of India (RBI) are on. Once it comes out with the final guidelines, we will align ourselves, as required,” said R V Verma, chairman and managing director, NHB.

Besides State Bank of India in the banking sector, the two big players in the teaser (dual rate) market are Housing Development Finance Corporation (HDFC) and LIC Housing Finance (LICHF), both HFCs. HDFC’s teaser rate portfolio is 27 per cent of its retail loan portfolio – around Rs 18,000 crore. LICHF’s portfolio is Rs 8,000-9,000, according to sources.
 

TOUCHING THE ROOF
Cities	2007 Index	Jan-Jun 2008	Jan-Jun 2009	Jan-Mar 2010	Jan-Mar 2010	% rise
Surat	100	101	111	109	136	24.77
Mumbai	100	112	124	134	160	19.4
Ahmedabad	100	106	127	113	131	15.92
Chennai	100	104	120	164	183	11.58
Kolkata	100	114	162	165	176	6.66
Bengaluru	100	73	58	64	68	6.25
Delhi	100	124	121	106	110	3.77
Hyderabad	100	96	65	81	82	1.23
Source: NHB Residex

While banks had to make a provision of 0.4 per cent for lending at teaser rates, HFCs do not follow this guideline. With NHB planning to bring this in line with RBI’s norm of two per cent, HFCs will have to set aside significant sums. For instance, HDFC will have to keep aside another Rs 360 crore.

HDFC, in its recent quarterly results, made a provision of Rs 727 crore for the entire loan portfolio. According to the existing guidelines, it needed to keep Rs 349 crore. So, it has an excess of Rs 378 crore.

“HFCs were not required to make any provision for standard assets with respect to housing loans. But now, a provision of two per cent will be required on all dual rate loans. It is still not clear whether the two per cent figure is for new loans or for existing loans as well. However, since we are carrying excess provisioning of over Rs 350 crore, our existing loans will not be impacted by this new announcement,” said the HDFC spokesperson.

SBI, which has disbursed Rs 23,000 crore under its dual rate scheme, will have to provide for Rs 450-60 crore.

The other two guidelines – capping the loan-to-value at 80 per cent and raising the risk weight for loans above Rs 75 lakh, will also be put in place. “By issuing similar guidelines, we want to ensure that lenders do not face any risk if property prices fall sharply,” said Verma, adding the recent spike in property prices was worrying the regulators. At present, the risk weight on loans where the LTV ratio is above 75 per cent is 100 per cent for HFCs.

According to the NHB Residex, which is going to be a quarterly real estate index hence forth (from half-yearly), the rise in real estate prices in some metros is quite sharp. Mumbai, Ahmedabad and Chennai have seen prices rise by 19 per cent, 16 per cent and 11 per cent, respectively, between March and June-end. Prices in Surat have shot up by 24 per cent in the period.