Booster shot for real estate sector; National Housing Bank to pick up stakes in HFCs

Pacts between lenders and developers not to deter discounts to homebuyers

To help revive the ailing real-estate sector and give a further push to affordable housing where the government is placing a lot of thrust on, finance minister Nirmala Sitharaman will soon announce a clutch of steps. National Housing Bank (NHB), until recently the regulator for housing finance companies (HFCs), will be allowed to go beyond its current role as re-financier to HFCs and pick up equity stakes in some of them, in a move that would significantly enhance these liquidity-starved entities’ ability to mobilise funds, including bank finance.

Also, banks may be nudged to relax their loan covenants with the real estate developers in order to facilitate faster clearance of the huge mass of inventories with the latter via deep discounts to homebuyers.

The Cabinet in early August gave NHB approval to infuse an extra Rs 10,000 crore into eligible HFCs in its financial year through June 2020 to shore up their liquidity and boost flow of funds for affordable housing loans for individuals, over and above the support being given by NHB to the HFCs through its two existing refinancing schemes. Accor-ding to sources, NHB may be asked to use the additional funds to buy equity stakes in select HFCs. It is reckoned that NHB’s presence on the HFC boards would improve their governance, besides bolstering their capital base much more than the refinancing route would.

Similarly, relaxation of the loan parameters pertaining to net worth and profitability between lenders and real estate players will mean that post-discounts value erosion of projects won’t be an impediment to reasonable attempts to clear inventories and save projects.

“As it is not a regulator any more, NHB should take equity in HFCs. Such a move will improve governance and give confidence to banks and other lenders to give liquidity support to HFCs,” said former NHB chairman RV Verma. Verma added banks might be able to recover their loans stuck in many projects if developers cleared inventories with lower profitability than factored in the loan pacts.

Even though the NHB norms allow HFCs to borrow 12 times their net owned funds (aggregate of the paid-up equity capital and free reserves), lenders hesitate to lend to HFCs whose debt-to-equity ratio is more than 7, the RBI norm for non-banking finance companies (NBFCs). The RBI, which became g the regulator for HFCs too last month, has recently said that HFCs are one of the categories of NBFCs for regulatory purposes. The RBI is expected to review the current regulatory norms for HFCs soon.

Under the plan announced in the Budget, the government has offered a one-time six-month partial guarantee of Rs 1 lakh crore to public-sector banks (PSBs) for purchasing consolidated high-rated pooled assets of financially-sound NBFCs. This has covered their first loss of up to 10% and is aimed at easing the liquidity stress in the NBFC/HFC sector and increase the access of these institutions to bank finance.

To achieve the goal of housing for all by 2022, the FY20 Budget provided an additional deduction up to Rs 1.5 lakh for interest paid on loans borrowed up to March 31, 2020 for purchase of house valued up to Rs 45 lakh. The goods and services tax (GST) council also lowered GST rate on affordable homes to 1% from 8%, without input tax credit from April 1. The GST on projects under construction, which are not under the affordable housing segment, was reduced to 5% from 12%.

In October 2018, just after the IL&FS crisis flared up and concerns about the repayment ability of some HFCs, including DHFL and India Bulls, started to depress market sentiments, the NHB had raised its refinancing target for 2018-19 (July-June) by 25% to Rs 30,000 crore from the initial aim of Rs 24,000 crore. Later, the target was raised to Rs 50,000 crore after the RBI approval. DHFC has over Rs 90,000 crore debt, half of which it owes to banks and the rest to other financiers including mutual funds, pension funds and insurers.

The liquidity challenges post-IL&FS crisis pulled down growth in assets under management (AUM) of HFCs in the second half of FY19, a CRISIL study showed. With funding access being affected, non-banks, including HFCs, were forced to curtail disbursements and focus instead on conserving liquidity. The AUM growth of HFCs slowed to 10% in H2FY19 from 21% in H1FY19.

The slowdown in the construction sector contributed to GDP growth falling to 5% in Q1FY20. Growth in gross value added (GVA) in construction slowed to 5.7% in Q1FY20, from 7.1% in Q4FY19 and 9.6% in Q1FY19.