Tag: HFCs

NPAs of NBFCs, HFCs may rise for 3-4 quarters due to tweak in norms

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Non-banking finance companies (NBFCs), including housing finance companies (HFCs), may see an increase in non-performing assets (NPAs) for three-four quarters due to the tweak in norms relating to when a borrower account can be flagged as overdue and tightening of rules relating to upgradation of NPA accounts.

However, NPAs are expected to stablise a couple of quarters after the Reserve Bank of India’s modified “Prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) pertaining to Advances” take effect, say industry experts.

The RBI has asked lending institutions to comply with the aforementioned prudential norms at the earliest, but not later than March 31, 2022.

Limited economic impact

Experts assessed that the impact of the modified norms could only be an accounting one and not so much economic as many NBFCs are not only holding more than required provisions under the expected credit loss (ECL) framework but also Covid-related provisioning buffer.

“Many NBFCs are following monthly tagging of NPAs but RBI has proposed NPA tagging as part of day-end process for the relevant date. So, due to the changed norm, assets in the special mention account/SMA-2 category (when principal or interest payment in a loan account is overdue for more than 60 days and up to 90 days) could migrate to the NPA category,” said a senior NBFC official.

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, assessed that the RBI’s clarifications to the ‘Prudential norms on IRACP pertaining to Advances’, which now ask the NBFCs to recognise NPAs on a daily due date basis as part of their day-end process, will lead to higher gross NPAs (GNPAs).

No more flexibility

Referring to most NBFCs following month-end NPA recognition, he noted that typically, they ramp up collection activity on overdue accounts between the due date and the month end, which is why overdues reduce towards the month-ends. Now, this flexibility is no longer available.

“Bounce rates in the 60-90 days bucket are estimated at 25-35 per cent. Consequently, a significant proportion of the loans in the 60-90 days bucket may slip into the more than 90 days overdue bucket and will have to be recognised as NPA,” Sitaraman said.

On RBI stipulation that loan accounts classified as NPAs can be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower, he opined that typically, it has been difficult for retail borrowers classified as NPAs to fully clear their three or more overdue instalments quickly.

Data shows these borrowers clear only one or two additional instalments typically, so their accounts remain overdue even when it’s for less than 90 days.

Sitaraman said:“The combination of day-end recognition and tighter upgradation criteria means such accounts are likely to remain classified as NPAs for a longer period.

“Consequently, the headline reported GNPAs will rise and stay elevated for some time. This will also increase the operational intensity for NBFCs as they align their systems for daily stamping of NPAs.”

RBI tweaked the criteria for upgradation of accounts classified as NPAs as it found some lending institutions upgrading accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues, partial overdues, etc. To avoid any ambiguity in this regard, the central bank clarified that loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by borrower.

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HFCs’ AUM to grow 8-10 per cent in FY22 against 6 per cent in FY21: ICRA

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Housing Finance Companies’ (HFCs) growth is expected to pick up in the rest of FY2022 despite headwinds in the first quarter (Q1) of FY2022, but weak asset quality is likely to keep their profitability subdued, according to ICRA.

The credit rating agency estimated that HFCs’ portfolio is likely to grow by 8-10 per cent in FY2022 against 6 per cent in FY2021.

ICRA expects gross non-performing assets (GNPAs) to improve marginally from June 2021 level (of 3.6 per cent), but to stay elevated and higher by 40-70 basis points as on March 31, 2022, as compared to March 31, 2021 (of 2.9 per cent).

The agency opined that though the portfolio growth is expected to drive an improvement in revenue, the expected elevated credit costs are likely to keep the profitability subdued in FY2022.

Growth agenda back on the table: Ravi Subramanian, MD and CEO of Shriram Housing

ICRA observed that healthy demand in the industry, increasing level of economic activity and increasing vaccination in the country are expected to result in a steady growth in disbursements and improvement in collection efficiency (CE) in FY2022.

Covid impact

Sachin Sachdeva, Vice-President and Sector Head, Financial Sector Ratings, ICRA, said: “Overall on-book portfolio of HFCs in India is estimated at ₹11.0 lakh crore as on June 30, 2021, with exposures across home loans (HLs), loan against property (LAP), construction finance (CF), and lease rental discounting (LRD).

“The Covid-19-induced disruptions moderated the portfolio growth to 6 per cent in FY2021. Nevertheless, despite nil sequential growth in Q1 FY2022, aforementioned favourable factors provide hope for better growth prospects in FY2022 with an estimated growth rate of 8-10 per cent.”

FinMin allows small HFCs to take recourse to SARFAESI law

The agency noted that HFCs’ asset quality metrics weakened quite sharply in Q1 FY2022 because of the localised lockdowns imposed by various States/Union Territories (UTs) on account of the second wave, which impacted the borrowers’ cash flows and hence the CE.

“The jump in overdues was the sharpest in the recent past, as borrower-level liquidity got stretched in the absence of loan moratorium. The marginal borrowers, therefore, slipped into the NPA (non-performing asset)/overdue category in Q1 FY2022,” ICRA said.

Consequently, the Gross NPAs increased to 3.6 per cent as on June 30, 2021, from 2.9 per cent as on March 31, 2021 (2.3 per cent as on March 31, 2020).

Per the agency’s assessment, though the asset quality deteriorated across segments, CF was worst hit followed by LAP and HL. Thus, entities with high exposure to CF witnessed a higher impact than the industry average.

The headline asset quality numbers are expected to moderate slightly from current level as the trend in the CE continues to remain encouraging.

Nevertheless, ICRA expects a 40-70 basis points (bps) increase (net of recoveries and write-offs) in GNPAs by March 31, 2022, from GNPAs as on March 31, 2021, assuming there are no further Covid-19 induced lockdowns. One basis point is equal to one-hundredth of a percentage point.

Sachdeva said the pre-tax return on average managed assets (profit before tax/PBT per cent) for FY2022 is likely to remain similar to FY2021 level (1.9-2.0 per cent). Optimistically, if the collection efficiency trends post a steady and healthy revival and if slippages remain contained, then PBT per cent may also benefit from reversals in provisions.

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Banks, HFCs on hiring spree amidst rising home loan demand

Banking & Finance

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Banks, housing finance companies and NBFCs are on a hiring spree amidst rising demand for home loans.

Industry experts and players say that hiring for home loan departments is up by at least 20 per cent to 25 per cent in recent months as players look to expand their home loan portfolios in smaller towns and attract more customers through lower home loan rates.

“Hiring has gone up by 22 per cent to 25 per cent by banks, NBFCs and HFCs. This is especially the case in the last three to four months, especially after the second wave of the pandemic. A small portion seasonal in nature but we expect it to be largely sustained for the next few years. The requirement for additional staff is equally in urban and rural markets,” said Amit Vadera, Vice President – Staffing, TeamLease Services.

About 90 per cent of the requirement is in the sales function with starting salaries in the range of ₹15,000 to ₹20,000 along with attractive variable incentives.

Amidst the pandemic and work from home, many people are now looking at their own homes as well as larger homes, leading to the demand for home loans. Banks, HFCs and NBFCs consider the home loan portfolio to perform better as typically borrowers do their best not to default on home loans. They have been offering interest rates as low as 6.4 per cent (such as Union Bank) and are also charting out aggressive expansion plans.

“There has been increased hiring as most small finance banks, HFCs and NBFCs in different segments are expanding their reach to newer locations and need people,” said the head of a housing finance company.

However, he noted that many employees as are moving from one company to leading to higher manpower costs.

“Every company is in a hiring spree. Everybody feels that there will be a huge uptick in housing and other credit demand,” he, however, noted.

Shriram Housing Finance had in September announced that it plans to hire 350 employees in Andhra Pradesh and Telangana as part of its expansion plans in the region. ICICI Home Finance had also announced in September that it would hire over 600 people by the end of this calendar year to meet the demand for home loans.

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HFCs may see robust growth but NPAs could rise: CARE Ratings

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The second wave of the Covid-19 pandemic is expected to lead to a rise in the non-performing assets of housing finance companies in the near term with the Gross Stage 3 ratio expected to increase by 30 basis points this fiscal.

According to a report by CARE Ratings, the Gross Stage 3 ratio for housing finance companies would be 3.1 per cent, which would be around 30 basis points higher that 2.8 per cent in 2020-21.

“The deterioration would be higher in the first half of 2021-22; however, we expect that collections and asset quality for housing finance companies would improve in the second half as the economy improves,” CARE Ratings said on Monday.

While a large portion of deterioration would come from developer loan book, it expects that retail prime loans would also witness stress as borrowers have also been impacted economically during the pandemic.

The agency had earlier estimated a 20 basis points increase in Gross Stage 3 assets to 2.9 per cent at the end of 2021-22 from an estimated 2.7 per cent last fiscal.

For the analysis, it has considered top six large housing finance companies it rates.

Robust business growth

However, business growth for housing finance companies has remained robust and early indications from this fiscal suggest there would be a growth of about 8 per cent to 12 per cent in their portfolios, it said.

It also noted that many large housing finance companies have raised equity capital during last fiscal and some are in the process of raising equity capital in this financial year. “This has improved the strength of their balance sheets and augmented their loss-absorption capacity,” it said.

CARE Ratings further said that according to its estimate, the total equity capital likely to be raised during the current fiscal along with actual equity raised last fiscal would be more than sufficient for the total increase in Gross Stage 3 assets during 2020-21 and 2021-22.

“While we expect that the impact of the pandemic on Gross Stage 3 assets would be higher than what was earlier estimated, stronger balance sheets of large housing finance companies and higher equity capital buffers provide good comfort,” it said, adding that improvement in fund-raising abilities of these firms by tapping retail deposits augurs well for their longer-term credit outlook.

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Nischal Maheshwari, BFSI News, ET BFSI

Banking & Finance

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As we are going back to normalcy, the easy money has already been made in pharma and it is going to be very stock specific, says Nischal Maheshwari, CEO-Institutional Equities, Centrum Broking.

What will be the impact on Vodafone after Mr Birla’s resignation? Also, how exactly would Bharti and Reliance Jio gain and how should one approach the telecom sector now?
I continue to maintain my view that there is trouble for this sector. Even after the number of players came down from 7-8 to 3, we were still not able to increase ARPU. Now, one of the companies is just throwing up its hands saying that they are not able to manage. In the short term, there is more pain. Maybe the government will come out with a package or something delaying the payments. But long term, it could be good. But in the short term, it would be pain.

Why would you say that? As Vodafone is losing market share, the subscribers are not going to stop using mobile phones. They will switch to Bharti or Jio and both will gain market share as a three-player market becomes a two-player market.
That was true earlier also. Vodafone has been hanging by a thread. In the last 12 months, every month Vodafone has lost customers. There has been a question of its survival. But still ARPUs have not increased. Both the top players continue to come with very aggressive numbers though their bottom packs have been raised from Rs 49 to Rs 79. But there are enough discounts out there. At the end of the day, I would look only at the ARPUs and ARPUs do not seem to be increasing and none of the two players are actually going out and saying that they are going to be giving away or taking a backseat as far as competition is concerned.

The world over, it has been a two- three player market. There has never been seven or eight players anywhere else. In India, they were surviving. Now, they have been cut down too and the existing players will continue to compete with each other.

SBI seems to be recovering faster than anticipated and the hit on account of Covid second wave is not as much as the Street was pencilling in or even the industry average. What’s next for SBI?
The results have been good but I would be a little bit worried given that most of the other banks have shown higher slippages as far as the second wave is concerned, especially, on the retail side. I would wait for another quarter because my issue remains that the coverage ratio is very low for SBI. It is only 40 bps which they have provided for unlike most other banks especially on the private side, who have provided for anything between 1% and 1.5%. Otherwise, the bank is doing pretty well. The recoveries have been good and it seems to be on a very solid wicket. So wait for another quarter but definitely it is a buy on dips.

Everyone is bullish on real estate and housing demand but somehow the HFC stocks have done nothing. Why is that?
After the first wave, most of the HFC stocks doubled from the bottom like Can Fin, LIC. HDFC has been a bit of an underperformer but that has also done well. During the second wave, basically everybody seems to have suffered — and the slippages are much higher in companies like LIC Housing Finance. HDFC Limited came up with very good numbers, Can Fin also faced some amount of pressure. So during the second wave, market was worried as far as retail is concerned/

The market is worried what is really going to happen if another wave comes in because the retail seems to be getting much more hit than the corporate book in the banks because the corporates are able to get their people vaccinated and and it so they continue to work but the collections suffer as far as the retail is concerned. That is why the market is a bit worried and wants to wait out for another quarter to see what really happens on the health side.

If everything goes fine, then we will start seeing some action in housing finance companies. But having said that, I believe it is a good time because these stocks have not performed and if real estate rightly is doing well, it is only a matter of time that the housing finance stocks will also start doing well. So we have a buy across the whole sector.

Where within banks are you finding comfort to buy afresh?
The top two banks SBI and ICICI are the ones I would put my money on. As the recovery in the economy happens, most of these banks are showing stronger recovery in their old NPAs. ICICI, Axis and SBI historically have had much higher NPAs in their portfolio. So when the recovery happens, they would be the beneficiaries and that is why one is seeing a strong recovery there. HDFC and Kotak are the better ones of the lot. They never had much problem and that is why they have quoting at 3.5-4 times. During this phase, they may underperform the market.

The Covid bump off for pharma companies is over. Today Cipla will come out with numbers for the quarter gone by. Is market pricing in the normalisation of pharma earnings?
I think so. Last year when Covid hit, the pharma sector came out of five years of underperformance with most of the stocks doubling in a very short period of time. But if you look at a longer time horizon, I think they would have just returned whatever 30-40% kind of a return on a five year time basis. So yes, for a short term, outperformance happened. The API companies started showing 20% plus kind of margins and as the Covid receded or things became normal, most of them have hit below 20% margin and are not even able to hold 17-18% margin.

So as we are going back to normalcy, the easy money has already been made in pharma and it is going to be very stock specific. We may see something like Divi’s outperforming. A new stock which got listed, Gland Pharma, is outperforming. Now it is going to depend on earnings growth and valuations.

Sun has been an underperformer for a long period of time and for two quarters, they have started showing good performance on the specialty portfolio which the market was waiting for. The stock is outperforming now. It is very, very stock specific now. The big move is over in pharma



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Anarock, BFSI News, ET BFSI

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NEW DELHI: Banks and other financial institutions have an exposure of $100 billion to real estate sector, of which 67 per cent are safe while the remaining loans are under pressure or severely stressed, according to real estate consultant Anarock.

“At least 67 per cent (or approximately $67 billion) of the total loan advances ($100 billion) to Indian real estate by banks, NBFCs and HFCs is currently completely stress-free,” Anarock Capital, a subsidiary of Anarock, said in a statement on Monday.

Another 15 per cent (about $15 billion) is under some pressure but has scope for resolution with certainty on at least the principal amount.

“$18 billion (or 18 per cent) of the overall lending to Indian real estate is under ‘severe’ stress, implying that there has been high leveraging by the concerned developers who have either limited or extremely poor visibility of debt servicing due to multiple factors,” the statement said.

Anarock Capital said the overall contribution of non-banking financial companies (NBFCs) and housing finance companies (HFCs), including trusteeships, towards the total lending to Indian real estate is at 63 per cent.

Individually, banks have a share of 37 per cent, followed by HFCs at around 34 per cent, and NBFCs 16 per cent.

Around 13 per cent loans have been given under trusteeships.

According to Anarock Capital, banks and HFCs are much better placed with 75 per cent and 66 per cent of their lending book in a comfortable position.

“Not surprisingly, nearly 46 per cent of the total NBFC lending is on the watchlist,” the statement said.

About 75 per cent of the total lending to Grade A developers is safe.

“This presents a comfortable outlook because out of the total loans given to real estate, more than USD 73 billion is given to Grade A builders,” the statement said.



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HFCs seek nod to impose pre-payment fee

Banking & Finance

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With banks offering home loan interest rates at an all-time low, housing finance companies are feeling the pain as many of their customers are opting for balance transfers. The attrition rate for HFCs in terms of customers undertaking balance transfers is between seven per cent and 10 per cent, according to industry players.

Therefore, HFCs are in discussion the Reserve Bank of India as well as the National Housing Bank seeking permission to impose a pre-payment penalty on customers who transfer their loan account.

“Housing finance companies spend time, effort, and money in originating and acquiring customers. Many choose to leave within six months to a year of the loan being disbursed as they are lured away by banks with cheaper interest rates,” said the head of a housing finance company.

“For customers, such a competitive interest rate regime is certainly a good thing and beneficial for them. That is why the regulators have also not taken any action,” he noted.

Lower interest rates

Banks such as Kotak Mahindra Bank and State Bank of India offer home loans at as low as 6.65 per cent and 6.75 per cent, respectively. On the other hand, HFCs collect interest between 7.45 per cent and 10 per cent.

It is difficult for HFCs to offer lower interest rates to existing customers as that would constitute the account to be considered as restructured.

Challenge for HFCs

“This is a bigger challenge for smaller and affordable housing companies as larger HFCs and banks are able to offer lower rates. We take the risk and give loans to first-time buyers who later go for a balance transfer. About 95 per cent of demand for housing is from the economically weaker section and lower income group, which is what affordable housing finance companies cater to,” said Pavan K Gupta, CEO, Muthoot Housing Finance.

HFCs should be allowed to charge a pre-payment penalty in case the customer moves in the first two-and-a-half to three years, Ravi Subramanian, Managing Director and CEO, Shriram Housing Finance, had said in a recent interview to BusinessLine.

He had, however, said the low-interest rates being offered by banks are not much of an issue as not many of HFCs’ target customers are not able to meet the conditions set by banks.

HDFC Chairman Deepak Parekh, too, had highlighted the challenge for HFCs to retain customers amidst low-interest rates being offered by a number of banks as well as increased loan amounts.

“Another niggling point for HFCs is the retention of customers. Lenders are susceptible to losing their existing customers to other players who often lure them through lower interest rates or increased loan amounts. As there are no prepayment penalties on floating rate loans, a lender can take over a home loan rather effortlessly,” he had said in a letter to shareholders.

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Customer retention is a challenge for HFCs: Deepak Parekh

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HDFC Ltd Chairman Deepak Parekh has highlighted the challenge for housing finance companies to retain customers amidst low-interest rates being offered by several banks and increased loan amounts.

“It would be of great comfort for all HFCs to have this issue put to rest,” Parekh said in a letter to shareholders.

“Another niggling point for HFCs is retention of customers. Lenders are susceptible to losing their existing customers to other players who often lure them through lower interest rates or increased loan amounts. As there are no prepayment penalties on floating rate loans, a lender can take over a home loan rather effortlessly,” Parekh said in a letter to shareholders.

Balance transfers only shift assets from one player to another, he said, adding that it does not increase home loans or home ownership at a system level.

“Yet, this is par for the course in a competitive business landscape,” Parekh said, pointing out that onboarding a home loan customer takes a great deal of effort and entails costs as well.

Other regulatory issues

In his letter, which is a part of HDFC’s Annual Report 2020-21, Parekh also highlighted other regulatory issues but said these are his personal views.

Despite differences in interpreting regulations, Parekh said that non-banking financial companies, including HFCs,follow Indian Accounting Standards (IndAS), which is still not aligned with the prudential guidelines.

“This results in differences in opinions between the inspection teams, regulated entities and even the auditors,” he said, adding that it may be prudent to resolve these issues sooner than later.

Insurance loan

He also said that the insurance loan to a home loan customer should be considered as an integral component of a housing loan and be permitted to be classified accordingly.

“Currently, an insurance loan given to a home loan borrower is considered as a non-housing loan. Insurance is voluntary for a home loan borrower,” he said.

Parekh further said that the current regulatory framework might have the unintended consequence of penalising a HFC for maintaining excess liquidity.

“Larger amounts of liquidity are being held by HFCs out of abundant precaution,” he said, adding that a minor tweak which could exclude surplus liquid balances from total assets to arrive at prescribed limits would go a long way in helping HFCs.

Parekh also remained optimistic about the demand for home loans despite the resurgence of Covid infections.

“Despite the economy contracting 7.3 per cent in 2020-21, the demand for home loans surpassed all expectations. Going forward, the risks of recurring waves of infections may result in temporary set-backs, but the inherent demand for homes loans remains stronger than ever,” he said.

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Market share of banks in individual housing loans up: NHB report

Banking & Finance

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The market share of banks in individual housing loans has gone up from 62 per cent in 2017-18 to 67 per cent in 2019-20, while that of housing finance companies (HFCs) has come down from 38 per cent to 33 per cent.

According to the National Housing Bank’s latest Trend and Progress of Housing in India report, the pace of growth of banks remained higher than that of HFCs, partly supported by portfolio buyouts, leading to increase in their market share in individual loans.

In 2018-19, the market share of banks and HFCs in individual housing loans (IHLs) was at 64 per cent and 36 per cent, respectively. The overall growth in IHLs of banks and HFCs combined stood at 10 per cent in 2019-20 compared to 16 per cent in 2018-19.

The report said: “The real estate and Housing Finance Sector in India began to witness a moderation in growth after the IL&FS crisis in September 2018. However, with proactive measures and various other initiatives of the Government, RBI and NHB, the sector started to gain momentum.”

The total outstanding IHLs of HFCs and banks combined was around ₹20-lakh crore as at the end of March 2019-20 compared to around ₹18-lakh crore in 2018-19.

Outstanding IHLs of Banks and HFCs registered year-on-year growth of 8.5 per cent and 3 per cent, respectively, NHB said.

Slab-wise analysis

Slab-wise analysis of total IHLs of scheduled commercial banks (SCBs) and HFCs combined shows that around 44 per cent of the total IHL as on March 31, 2020 (against 47 per cent as on March 31, 2019) was towards 124 lakh housing units (119 lakh as on March 31, 2019) within IHL slab of ₹25 lakh.

Fifty six per cent of the total IHL (53 per cent as on March 31, 2019) was towards 30 lakh housing units in the IHL slab of over ₹25 lakh, the report said.

Referring to growth in the number of housing units financed within IHL slab of ₹25 lakh, NBH observed that affordable housing continues to grow on account of robust demand and various support measures towards this segment.

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As balance transfers rise, HFCs reprise demand for foreclosure charges

Banking & Finance

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Banks admit that anywhere between 30% and 35% of their incremental home loan growth has been coming from non-banking financial companies (NBFCs) and HFCs.

At a time when banks are aggressively growing their housing loan portfolios with lower rates and balance transfers from non-bank lenders, housing finance companies (HFCs) have reprised their long-standing request to levy foreclosure charges for such transfers. They believe that the inability to levy a fee for balance transfers makes it difficult to recover the cost of acquiring a customer, especially in the first few years of a loan.

Banks admit that anywhere between 30% and 35% of their incremental home loan growth has been coming from non-banking financial companies (NBFCs) and HFCs. The incidence of customers shifting their balances from non-banks to banks has become particularly pronounced in FY21, as the repo-linked pricing regime and huge surplus liquidity allowed banks to reduce interest rates much faster than non-banks could.

In the regulatory framework for HFCs issued on October 22, 2020, the Reserve Bank of India (RBI) said HFCs could not impose foreclosure charges or prepayment penalties on any floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligants. However, companies say this is unviable because for smaller HFCs, the cost of acquiring a new customer is high, given the involvement of a good deal of personal contact and the absence of bureau scores for new-to-credit (NTC) customers.

Industry executives said HFCs have been requesting the RBI and before that, the National Housing Bank (NHB), to be allowed to charge foreclosure fees at least in the first two years of a loan. Ravi Subramanian, MD & CEO, Shriram Housing Finance, said after an HFC on-boards a new customer at a 10-12% interest rate, they perform well in the initial years of the loan and build a good credit score. At this point, a bank comes in and offers them a loan at 7-8%. “But one must remember that the customer’s risk profile has not changed dramatically,” he said, adding, “This (the bar on foreclosure charges) is unfair on HFCs like ours which are bringing genuine customers into the fold. So we’ve made representations to NHB and RBI that HFCs be allowed to charge a minimum prepayment penalty at least for the first two years.”

Aavas Financiers told analysts in its last post-results call that the increased presence of banks and their cheaper loan pricing have been putting pressure on its balance sheet over the last three years.

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