NHB makes realty loans dearer for HFCs

MARCH 28, 2007: This one will further discourage specialised housing players to lend to the commercial real estate sector. The National Housing Bank (NHB) has asked housing finance companies (HFCs) to make a general provision of 0.4% of their total outstanding non-housing loans in the nature of standard assets.

Non-housing loans mainly comprise loans to the real estate sector, which any way attract a high-risk weightage of 150%.
The provisioning requirement will, however, be implemented in phases. Initially by March 31, 2007, HFCs will be required to make a provision of 0.1% of total outstanding non-housing loans in the form of standard assets.

Subsequently, the provisioning requirement will be increased to 0.4% in four stages by December 31, 2007. NHB has issued a notification on March 26, 2007, towards this end. With this diktat, it has for the first time asked HFCs to mandatorily make provision towards standard assets. This also means that HFCs will have to take a small hit on their profitability in fiscal 2006-07 itself.

Profitability will be impacted to the extent of the provisioning requirement. According to experts, non-housing loans essentially mean mortgage loans against commercial properties (real estate loans), project loans and lease rentals. Every HFC is allowed to offer non-housing loans up to 25% of the total long-term borrowings, in order to increase the interest rate spread.

Housing Development Finance Corporation (HDFC) managing director Keki Mistry sees this move as NHB’s signal in the context of a possible real estate bubble. “As far as HDFC is concerned, I don’t expect any significant impact. We, in any case, make a general provision against all standard assets, be it in housing loans or non-housing loans,” he said.

The provisioning requirement will be increased to 0.2% by June 30, to 0.3% by September and subsequently to 0.4% by December 31, 2007.

DHFL Vysya Housing Finance managing director R Nambirajan said, “The interest rate spread on housing loans has become quite thin. This has forced all HFCs to resort to non-housing loans within the total ceiling prescribed. This decision, therefore, will affect the profitability of HFCs. Although for the current year, the provision will be just 0.1% only, for the next year, the impact will be more.“

The NHB decision is seen as a follow-up measure to reduce HFC’s real estate exposure. The apex bank has already increased the risk weightage on loans to commercial real estate to 150%. It may be noted that the Reserve Bank of India has also been putting pressure on commercial banks to reduce their respective real estate exposures. Banks also make provision of 0.4% against real estate loans in the nature of standard assets.

Source: The Economic Times