Raise loans of Rs. 16,500 crore in FY19 after the RBI rationalised ECB policy last year
Amid rising interest rates and tight liquidity in the domestic market, housing finance companies (HFCs) are turning to external commercial borrowings (ECB) to bridge the funding gap and to optimise cost, while risk-wary domestic lenders continue to be cautious on the sector.
In the current financial year till January 2019, HFCs have borrowed ECB loans worth $2.32 billion ( Rs. 16,500 crore), after the RBI rationalised the ECB policy in April 2018 to allow HFCs, port trusts and a few other sectors to borrow overseas under the automatic route (without the need for the central bank’s approval). There were no ECB borrowings during FY18.
“This is advantageous in terms of diversifying the funding source of HFCs, and the size of the loans would be higher compared to domestic bond issues (done) on private placement basis,” said Srinivas Acharya, Managing Director, Sundaram BNP Paribas Home Finance.
In January 2019, the RBI also removed the sector-wise limits on ECB borrowings, allowing eligible borrowers to raise up to $750 million per financial year under the automatic route.
With ECB rationalisation, HFCs have more options to diversify their funding sources, whose major sources of borrowing till now included term loans from banks and financial institutions, issue of non-convertible debentures (NCDs) and commercial paper (CP), public deposits, and refinance from National Housing Bank (NHB).
For instance, PNB Housing Finance’s NCDs, as a percentage of the total borrowing, dropped from 43.20 per cent in December 2017 to 30.05 per cent in December 2018. The share of deposits fell from 21 per cent to 16.74 per cent during the same period. ECBs accounted for 6.11 per cent of the total borrowing as on December 2018, against 2.90 per cent a year earlier.
“The borrowing mix to a certain extent is subject to asset-liability management (ALM), and leans towards the most optimal source of funding available at each point in time, said VS Rangan, Executive Director, HDFC.
The borrowing mix of HDFC, India’s largest housing finance company, also saw fund-raising from debentures and securities lowering from 56 per cent in December 2017 to 49 per cent in December 2018. But the share of term loans rose from 13 per cent to 21 per cent during the same period.
“During the past year, the volume of bond market issuances saw a drop. Hence, term-loan funding took a larger share of the incremental borrowings,” said Rangan.
“Fiscal concerns, inflation pressures, oil prices, MTM issues in bank balance sheets, and FPI regulations were some key factors that kept large investments out of the bond markets,” he added.
Besides, the RBI also made some relaxations to the hedging provisions to make ECB loans more accessible and attractive to HFCs.
“No hedging is required for loans of tenor five years and above, minimum 70 per cent hedging for loans of three to five years. So, corporates have more flexibility to plan and time their hedges to make them more cost-effective,” said Rangan.
While ECB borrowing helps, HFCs maintain a healthy borrowing mix, according to industry experts, who feel it cannot replace the traditional borrowing channels, at least in the near future.
“Bank debt is about 30-32 per cent of the overall resource pool for NBFCs/HFCs, while the NCDs/CP market is close to 40-45 per cent; we don’t see a scenario where the existing sources can en-masse be replaced by ECBs,” said Rahul Prithiani, Director, CRISIL Research.
“Even before the IL&FS crisis, larger entities, with good rating, were occasionally tapping overseas borrowing to lower their cost and to diversify the resource pool,” Prithiani added.