The scare about housing finance companies is refusing to go away. Despite only one instance of downgrade of a developer by one rating agency the markets – both debt and equity – are seeing red in the books of all housing finance companies.
Until earlier this month, the freeze in the debt was assumed to be the result of IL&FS’s sudden downgrade. We now understand the problem for what it is: A change in the liquidity and rate cycle. Through 2017, demonetization led to surplus cash for banks and the resultant fall in savings and fixed deposit rates, sent a wave of money to debt mutual funds. This reduced the cost of money for those tapping the wholesale debt market: the Non bank finance companies (NBFCs) and the Housing Finance companies (HFCs).
On an average NBFCs and HFCs grew their book by 20 percent; but some grew by 40 percent. It is tough to double your book in 3 years by lending only to retail home buyers, since that is inherently a time and labour consuming exercise. So some of the easy money that NBFCs and HFCs got from debt funds and private equity investors went to fund builders, who were any way hard up post demonetization.
Now that the easy money is over, markets are worrying whether this will only lower the growth of HFCs or will it uncover a pile of bad loans kept alive by evergreening. With one real estate company getting downgraded, the market is doubting the books of all housing finance companies. This may be a case of excessive fear. Samir Jasuja, owner of a real estate data Analystics firm Prop Equity, says real estate companies are not in the dire state they were three years ago. Private Equity giants like Piramal stepped into the breach and bailed out many of them three years ago. Also with the big ones-Unitech, Jaypee, Amrapali - already admitted to bankruptcy, the number of real estate companies in the same stressed state as Supertech are very few, probably amounting to say 15,000 cr.
But how does one convince the equity and debt markets of the quality of the books of the housing finance companies, now that the rating agencies don’t seem to have much credibility.
Time may be a healer. Rs 80,000 crore of Commercial paper(CPs) of HFCs and NBFCs mature in October, 77,000 crore in November and only about 33,000 crore in December. If HFCs are able to honour their commercial paper through November, the situation should ease.
The RBI is doing two things to help: 1. It is keeping the debt market well hydrated with liquidity through open market purchases.2. It is incentivising banks to lend a little more to NBFCs and HFCs.
But markets must not expect very quick securitization (sale) of loans by HFCs to banks. Private sector bankers are frankly wary of rushing in. Smarting under the regulator’s dismissal of their CEOs for, among other things, large bad loans and their poor disclosure, they are hardly keen to “bail out” NBFCs. In any case private lenders have a serious liquidity shortage, with loan-to-deposit ratio running at 90-110%. As for PSU Banks, 11 are in the RBI’s prompt corrective action rule. They can lend to only high quality assets. Of the remaining, PNB is as good as a PCA bank. That leaves SBI and to a much smaller extent Bank of Baroda to do the heavy lifting.
Net-net bank lending is not going to be a silver bullet. Debt fund managers and housing finance -companies- the two groups who are stuck with leverage- have a list of demands:
1.Some want RBI to do a TARP(purchase of loans) as was done in the US. This suggestion is a non starter because RBI Act allows the central bank to only lend against Govt bonds. And frankly, the central bank would never use its balance sheet to rescue loans lent recklessly to real estate companies. The moral hazard is unthinkable.
2. Another suggestion from HFCs is that they can rate the loans they put in for securitisation . If rated Triple A, RBI can lower the risk capital for these to 35%, like it is for loans to triple A NBFCs. Even if this is done, one can’t be sure banks will trust Rating agencies and buy such loans quickly or in large numbers. But the suggestion may be worth a try.
3. A third suggestion is that banks under PCA be allowed to lend to riskier loans.(currently PCA banks can only lend to A rated loans and above). The suggestion to dilute PCA rules is ridiculous. Banks are under PCA because they have high NPAs. Asking them to lend to risky borrowers is innately suicidal.
Some banks can be pulled out of PCA if they are adequately capitalised. But that is a step the government needs to take not the regulator.
But fundamentally, banks and mutual funds and hence debt and equity markets will remain wary of NBFCs and HFCs till someone like RBI checks their books.
For starters, RBI is not the regulator of HFCs, which are the ones facing a trust and liquidity deficit. NHB is the regulator, and incidentally the body hasn’t had a Chairman for over two months. If RBI has to provide any help to HFCs, their regulation should be shifted from NHB to RBI, at least temporarily. The central bank could do a quick AQR or asset quality review of their books and report on which ones are facing only liquidity shortages and which have an asset quality problem and how much.
Once the real NPAs (non performing assets) are known, markets will be willing to lend debt and equity to these entities at an appropriate price.Clearly the time for light touch regulation for HFCs and NBFCs is over. The times of aggressive growth is also over.