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1. Considering the thrust of the Government on housing more particularly affordable housing and evolution of a conducive environment for conducting housing finance business in the country over a period of time, number of registered housing finance companies (HFCs) rose from 32 in 2002 to 51 in 2011 to 101 in 2019. Many of these newly registered companies operate in Tier 2 and Tier 3 cities and extend affordable housing loans to otherwise unserved sections of the society such as low salaried persons, self employed, small shop keepers, taxi drivers, small transport operators, nurses, school teachers, barbers, artisans, tea shop walas, etc. There loan size is about Rs. 10 lakh. Many of the borrowers of these companies do not have documented income and are normally non-income tax payers. However, these companies have developed certain scoring models to assess the credit worthiness of their borrowers. They have also established good recovery mechanism and are able to keep their NPA levels within the manageable limits for which they have to engage large workforce. The rates of interest charged by them is usually higher than the banks and large size housing finance companies due to high cost of their borrowings and the expenses they have to incur on recovering of their dues. These companies do not have access to public deposits and have necessarily to rely on the borrowings besides owners equity. After failure of few large sized non-banking finance companies recently, their borrowings from banking channels have also dried up and some of them had to resort to sale/assignment of their portfolio to stay in business. The assignments were not only to banks but also to middle or large sized HFCs. All these companies were already passing from a very hard times when the Pandemic Covid -19 struck .
2. Pandemic Covid–19 and consequent lock down of the Country has affected all sectors of the economy causing huge adverse impact on the businesses and national economy. Shops, offices, factories, transport etc. have remained closed during the lockdown period. It has certainly dented the repayment capacity of the borrowers including that of housing loan borrowers. HFCs more particularly those operating in the affordable segments which were already undergoing critical phase got further hit by loss of business and loss of employment of their borrowers.
3. Under these circumstances Reserve Bank of India (RBI) announced a Regulatory Package on March 27, 2020. One of the measure announced was the permission to the specified lending institutions including housing finance companies to grant moratorium on term loans outstanding as on March 1, 2020 till May 31, 2010 to lessen the burden of debt servicing brought about by disruptions on account of COVID -19. On April 17, 2020, RBI, in the matter of asset classification further decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day norm shall exclude the moratorium period i.e. there would be as asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. It was clarified that the rescheduling of payments, including interest, will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies by the lending institutions. There are media reports indicating that the moratorium period may be extended by another 3 months. Further, to meet the sectoral credit needs, RBI also decided to provide special refinance facilities to NABARAD, SIDBI and NHB. Special Refinance Facility of Rs 10000 crore was announced to NHB for supporting HFCs.
The measures hitherto undertaken by RBI/NHB are certainly welcome steps. These measures provide relief to the borrowers of the burden of debt servicing during these difficult times and also protect his/her credit history. They also provide relief to HFCs in prudential norms relating to asset classification and by providing them of liquidity support via Special Refinance Facility.
4. However, it cannot be said with certainty that these measures will alleviate the sufferings of the borrowers and they will be in a position to start paying their instalments of loan immediately post lifting of the lock down. The lockdown has impacted their businesses and occupations and it will take some time before the situation return to normalacy. What is, therefore, needed is complete re-look at the borrowers profile and restructuring of the loan keeping in view his future repayment capacity. This would avoid defaults in the sector and loans turning NPAs in the post lock down period. Fortunately, the Housing Finance Companies (NHB) Directions, 2010 which are currently applicable to HFCs provides for such an eventuality. Paragraph 2(1)(zc) of the said Directions which defines “sub-standard asset” carves out a proviso by excluding the loans rescheduled where natural calamity impair the repayment capacity of the borrower. There can be difference of opinion on the issue whether Covid -19 pandemic can be regarded a case of natural calamity. Government of India, Ministry of Finance in OM No. F.18/4/2020-PPD dated February 19, 2020, in the context of invocation of Force Majeure clause by the Government Departments in the contracts, has clarified that it should be considered as a case of natural calamity. A similar clarification from RBI in the context of asset classification of loans by NBFCs and HFCs will go a long way in avoiding unnecessary discussion on this issue and will help companies to re-schedule these loans without any asset downgrades.
5. Non receipt of regular instalments of loans from the borrowers by HFCs more particularly those operating in the affordable segment will completely disrupt their cash flows which in turn will have impact on their revenue, repayment capacity, holding on to the employment and normal functioning. Many may have to resort to reduction in remuneration of their employee and even laying off of their staff adding to unemployment in the economy. On the other hand it cannot be said that the borrowers will start paying loan instalments immediately post lifting of the lock down as they have to allocate their resources for meeting their other pressing needs and for bringing their life back to normalcy.
Under these circumstances, it will be a good idea if arrangements are made for regular repayment of loan instalments to HFCs. For this purpose RBI/NHB/Government/Banks can provide what may be called “COVID LOAN” for a period of one year or for such other period as deem appropriate keeping in view the profile of the borrower at reasonable rates of interest and disburse the same to the HFCs on behalf of the borrower in instalments as per the Repayment Schedule originally fixed between the borrower and HFCs. The said loan will have to be secured by extension of the mortgage which already exist in favour of the HFCs. The repayment of COVID LOAN should be made co-terminus with the original housing loan. No doubt it will increase the instalments payable by the borrower, but considering that the borrower has already left behind the impact of COVID-19, he should be able to meet the increased instalment over period of time. With this there will be a win- win situation for all. Not only this, there will also be marginal increase in loan to GDP ratio, which is very law in our country compared to other countries in the world. RBI should give regulatory concession in LTV Ratio if so required for implementation of this Scheme.
6. I have mentioned supra that to continue in business small HFCs are resorting to assignment of their seasoned portfolio to banks. Under this arrangement, they transfer their loan-book at pre-determined rates leaving the difference between such rate and the contracted rate as agency commission for the concerned HFCs for servicing of such loans. However, this has afforded arbitrage opportunity to large/Mid sized HFCs as they also buy such loans from small HFCs and in turn get funded by banks and all India financial institutions like NHB.
This can be good source of funds for HFCs and can give fillip to the affordable housing. This can also help development of securitisation market in the country. HFCs can concentrate on origin of the loans. By transferring these loans regularly while on the one hand they can serve large population, on the other hand they can also increase their fee business. In this manner while ensuring their growth on sound lines, they will be able to meet housing loan requirement of larger section of the society.
7. In fact the business which NHB can transact under the National Housing Bank Act, 1987 specifically include the power to acquire rights and interest of any housing finance institution in relation to any loan or advance made or any amount recoverable by such institution by transfer or assignment (Section 18 of the NHB Act). NHB is the ideal institution to kick-start this activity by laying downs norms for acquisition of loans of the HFCs under this model and by regularly acquiring them. This can also be a pre-cursor to securitisation of housing loans by NHB. Needless to say that it will go a long way in alleviating the suffering of HFCs in this period of COVID-19 and thereafter.
8. Failure of few NBFCs or an outbreak of COVID-19 will have no impact on estimated housing shortages in the country. As per Report of Technical Group on Urban Housing Shortage (2012-2017), the shortage was 18.78 million units in urban areas as on 2012 in the country of which 10.55 million (56.18%) was in EWS category, 7.41 million (39.44%) in LIG category and 0.82 million (4.38%) in MIG and above categories. Similarly, in rural areas total estimated shortage is about 43.70 millions units of which 90% is in the BPL category. By now this shortage must have increased further.
On the other hand while failure of few NBFCs will have no impact on the demand for housing, COVID-19 will certainly impact its demand temporarily due to slow down of economy and loss of employment opportunities. There may be increase in demand for housing once the economy activity picks up again. In fact housing itself will help revive the economy as it has been termed as the “Engine of Equitable Domestic Growth of the Economy” because of its high yield on invested resources, a high multiplier effect and a host of beneficial forward and backward linkages in the economy. Housing affects 269 industries directly or indirectly. Housing sector is employment intensive and generate employment during its construction and afterwards for its maintenance. Construction sector is the second largest employer while housing alone is the fourth largest employer in the economy. A virtually unending list of vocations and professions directly or indirectly derive their livelihood from housing which includes construction workers, builders, developers, suppliers, civil engineers, valuers, property consultants, furnishers, interior decorators, plumbers etc. Housing and GDP are inter -linked and contribute to each others growth. Every rupees invested in housing adds to 1.54 paisa to the GDP. For every rupee invested in creation of housing, it is estimated 0.12 gets collected as indirect tax.
The eco system by way of establishment of HFCs, simplification of recovery procedure, record of credit history of the borrowers, registration of charges with the Central Registry, establishment of Mortgage Guarantee Company, fiscal concessions, single window construction approvals, computerisation of land records, rationalisation of stamp duties etc. etc. which has been developed in the country in last 30 years for promotion of housing activity, therefore, need to be strengthened further.
As mentioned earlier, after the failure of few NBFCs and due to COVID -19, the resources of small HFCs have completely dried up. This in turn is affecting borrowers in the affordable category and the eco-system. While non-viable companies or companies indulging in dubious activities have no reason to stay in housing finance business, the companies genuinely in the business need to be supported and banks and financial institutions should not penalise them because of failure of few NBFCs for which they are not responsible or cannot be blamed.
Housing finance is the most secured lending business. NPAs in this sector are the lowest. Therefore, banks and financial institutions including NHB should come forward to help and provide resources to genuine HFCs working in the affordable segment. In fact considering their reach and their need for resources, the lending by them should be skewed in their favour compared to bigger HFCs. Therefore, a large part of special fund allocated to NHB should go to these institutions rather than to those who can afford to raise fund in the capital market.
These lending institutions do have to secure their lending, but tendency to over secure need to be checked. This is for the reason that the value of house property is always more than the loan amount due to LTV regulatory requirements.
9. The measures suggested above may help these HFCs in the crisis caused by recent failure of few NBFCs and impact of Covid-19 and help protect the housing finance eco-system developed in the country over last 30 years to remove the housing shortages in the country.