HFCs receive NHB support to diversify sources of financing; loans may cost less

Mumbai: Borrowing costs of housing finance companies (HFCs) are expected to come down with the National Housing Bank (NHB) agreeing to grant partial credit enhancement (PCE) to bonds issued by these lenders. This move is aimed at helping HFCs pass on the lower financing costs to borrowers, especially in the affordable housing segment.

In a letter dated October 6, NHB informed housing finance companies that it will offer PCE on secured non-convertible debentures (NCDs) issued by them. The aim is also to help HFCs “diversify their sources of financing” and “reduce excessive dependence on banks”, according to NHB.

The National Housing Bank said the facility will be available only for non-deposit HFCs with an asset size of at least ₹1,000 crore. Second, companies must have a minimum rating of ‘A+’ from two rating agencies to qualify.

They must also keep their gross and net non-performing assets below 2.5% and 1.5% respectively to qualify, the NHB letter said.

“To attract investors at competitive rates, bonds issued by HFCs must have sufficiently high ratings,” the letter said. “Many of the HFCs are unable to issue bonds/debentures due to lower credit rating from the rating agencies due to various reasons including the inherent mismatch between assets and liabilities.”

NHB will charge an annual PCE fee on the pre-enhanced credit rating of the bond. The compensation is 25 basis points for AA+, 50 basis points for AA/AA- and 100 basis points for A+. An additional 2% fee will also be charged in the event of a rating downgrade or if the HFC defaults. A basis point is one hundredth of a percentage point. The increase will cover up to 50% of the bond issue size, with a minimum issue size of ₹50 crore. The term of the bonds must be between three and five years, and the proceeds can only be used to refinance existing debt. HFCs must submit an auditor’s report within seven days of receiving the proceeds.

The PCE, which will be extended as an irrevocable contingent credit line, is expected to improve the external creditworthiness of the bonds, allowing HFCs to raise funds at more competitive rates.