Housing finance companies (HFCs), which account for little under a third of all home loans disbursed, have, in the wake of the interest rate hike, been forced to increase the tenure of their loans, in some instances up to 20 years, creating a mismatch with their liabilities which are normally of much shorter tenure.
Asset-liability mismatch takes place when the liabilities (borrowings in the form of deposits) of firms are for a shorter duration than assets (loans to customers). Most financial intermediaries have a small mismatch all the time, but the problem is magnified when the asset tenure increases.
In the normal course, HFCs would be able to roll over their liabilities. But tightening liquidity doesn’t just increase the cost of borrowing, but makes it difficult for companies to raise money for longer tenures. HFCs are having to roll over their liabilities even faster than they did in the past. At the same time, they prefer not to raise the equated monthly instalments that customers will have to pay. Most simply increase the tenure of the loan.
“Asset-liability mismatch is becoming a concern (for smaller HFCs),” said Tarun Bhatia, head, financial sector ratings, at credit rating agency Crisil Ltd. According to Bhatia, HFCs are in trouble when the value of liabilities maturing (that have to be rolled over) in a year exceeds the accruals from the housing loans by 25%. Data on assets and liabilities of all HFCs are not readily available.
Industry analysts said smaller HFCs had consciously allowed the mismatch to increase in the recent past to maintain high profitability. As short-term borrowings are cheaper than long-term ones, an increasing level of short-term liabilities can push up profitability. An average housing loan has a tenure of 15 years, while HFCs mobilize most of their funds through issue of debt with up to five years of maturity.
The head of a HFC promoted by a financial services company, said there was no asset-liability mismatch issue for HFCs as a group. The situation is manageable, he added.
Data put out by home-loan regulator National Housing Bank showed the home loans disbursements in 2005-06 was Rs86,034 crore, of which HFCs accounted for only Rs27,411 crore—the balance was disbursed by banks. Housing Development Finance Corporation and companies such as LIC Housing Finance, which have strong financials and diverse sources of funding, would not be adversely impacted, said Bhatia.
The sharp rise in interest rates over the last year has led to a churning in the home-loan market. HDFC increased its benchmark rate by 300 basis points over the last 18 months to the current level of 14%.
NHB chairman S. Sridhar said the regulator was working on ways to deepen the securitization market, to give HFCs an extra option to raise funding.
Banks, which have the largest exposure to home loans , are unlikely to be impacted by the churning in home loans market as their exposure to the sector is relatively limited, and they are better placed to raise funds. “Rising interest rates on housing finance portfolio will practically not have a significant impact on banks,” said Vineet Gupta, head, financial sector ratings at Icra Ltd, a credit rating firm.
The total exposure of the banking industry to housing finance is likely to be between 10-15% of outstanding loans, which is not large enough to be worrisome, he added.