Among the biggest lenders to the housing sector, more so affordable housing, are the housing finance companies. It’s time to save these companies which are genuine lenders to the real estate sector especially due to their deeper penetration and better than banks' operational efficiency in the housing finance sector.

Recently, regulation of HFCs has come under RBI’s purview. And this presents an opportunity to tighten the credit standards of these lenders.

Of late, funding has come under severe constraint for HFCs. One of the ways to address this could be closer coordination between HFCs and banks. The relationship of HDFC Bank and HDFC is a standout example of such an arrangement. However, what makes such arrangements tricky is that independent HFCs and banks could never have the same governance structure as the instance cited above. Nevertheless, it is a path to consider where a high level of confidence and safeguards are built for co-origination of housing loans. This will help HFCs with not only the required funds but will also make them capital-light model along with superior return ratios.

HFCs have historically reported better asset quality for home loans than banks, and while there may be several factors at play here, what definitely works in favour of the HFCs is that being specialized in a vertical ensures that their risk management processes are sharply attuned to the needs of the segment.

What banks can do is provide money to HFCs with assurance of buying out a portion of their portfolio, subject of course to asset quality and other defined conditions. For example, if TTT Bank gives money to an HFC ABC, they can tell ABC that they will buyout 50 percent of its portfolio in the first year, 20 percent in the second year and so on. This will lead to a symbiotic relationship being developed between the HFCs and banks, and much of the liquidity issues of HFCs getting addressed.

With this a large chunk of the housing portfolio could come to the banks, with the process being better managed and controlled by HFCs. The bank will get commission for sourcing the loan proposal which is income for them without deploying capital. Banks will also be able to meet their priority sector lending targets with much better ease. Banks will be able to hedge the underwriting risk by giving loans of HFCs and re-purchasing them. This will help them access the skills of HFCs.

For HFCs, the network of the banks will be used for marketing their loan product which will enhance their reach and volume. The volume in turn, in three years, will go in favour of the banks. But the retained 10-15 percent of the volume after the bank's buyout at the HFC along with new business will also shore up the topline of the HFCs.

HFCs will also generate non-interest income in the form of fees for the life of the loan for maintaining the operations of the account.

The ultimate winner will be the consumers or citizens of India. This is because a customer will have greater access to housing finance products while the interest rate will be competitive and on the lower side given the benefit that banks will refinance the loans to the HFCs.

First Published:Oct 6, 2019 6:50 PM IST