The proposed cap on the quantum of public deposits that deposit-taking housing finance companies (HFCs) can hold is unlikely to impact them much as, over the last few years, they have stepped up reliance on alternative funding sources.

Non-convertible debentures, bank borrowings (including refinance from the National Housing Bank), and commercial papers are among the alternative avenues available to HFCs to fund their assets.

Regulatory framework

The Reserve Bank of India (RBI) proposes to halve the ceiling on the quantum of public deposits held by deposit-taking HFCs from 3 times to 1.5 times of their net-owned fund. This is part of the central bank’s draft circular on “Review of regulatory framework for HFCs and harmonisation of regulations applicable to HFCs and NBFCs.”

Of the 97 HFCs as of March 2023, fifteen are deposit-taking entities. Six of the latter need to obtain prior written permission from NHB before accepting public deposits.

The nine HFCs that can accept deposits are: Can Fin Homes, Cent Bank Home Finance, Aadhar Housing Finance, Housing and Urban Development Corporation, ICICI Home Finance (ICICIHF), LIC Housing Finance, Manipal Housing Finance Syndicate, PNB Housing Finance (PNBHF), and Sundaram Home Finance.

Of these nine, PNBHF and ICICIHF have a relatively higher dependence on public deposits than others. For PNBHF and ICICIHF, public deposits constituted about 31 per cent (at September 2023) and 25 per cent (as of March 2023), respectively, of their borrowing mix.

“As per RBI data, the total public deposits outstanding for HFCs were about ₹1.35-lakh crore as of March 2023. Out of this, more than 60 per cent is estimated to be with the erstwhile HDFC Ltd., which merged with HDFC Bank (with effect from July 1, 2023).

“Thus, the residual public deposits with deposits taking HFCs could be around ₹50,000 crore. Once the RBI cap kicks in, the quantum of residual deposits could eventually come down to about ₹25,000 crore out of HFCs’ overall borrowings of about ₹13-lakh crore by HFCs,” per an assessment by housing finance sector expert Kulasekhara Chakravarthy.

So, the proposed cap on the quantum of public deposits that deposit-taking HFCs can hold will not have any adverse impact on this category of home financiers, he added.

Manish Jaiswal, MD & CEO, Grihum Housing Finance, observed that deposits by nature are short-term, whereas housing loans’ contractual maturity is about 20 odd years. However, the actuarial life of the loans is around 6-7 odd years due to prepayment.

“My sense is that if the proposed regulation is implemented, the cost of funds for the deposit-taking HFCs may not even rise by 3-4 basis points. So, to that extent, the impact will be minimal because dependence on deposits itself is very low, given the nature of business,” he said.

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