A road being re-constructed near the building of IL&FS, one of India's leading infrastructure-development and finance companies in Mumbai. | Photograph: Abhijit Bhatlekar | Bloomberg
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New Delhi: The National Housing Bank (NHB), stung by the IL&FS crisis, is planning to step up its scrutiny of housing finance companies as it looks for advance warning signals to ferret out stress in company balance sheets.

The government regulator for housing finance companies (HFCs) plans to employ data analytics for a more focused inspection of the firms, the move coming months after infrastructure lender IL&FS’ Rs 450-crore default, which exposed the stress in the sector and triggered a series of rating downgrades.

The NHB, an official in the regulator told ThePrint, is finalising the process to hire a firm to help out with the data analytics.

“The idea is to use the companies’ data from the last 10 years, including inspection reports and annual reports, and analyse them using data analytics,” said the NHB official.

“This will give us a sense of the red flags, along with a comprehensive profile of the company, including any suspicious transactions or previous instances of asset liability mismatches,” the official added. “This will ensure a better and more focused inspection.”

According to the NHB official, the current cycle of 15-day onsite inspections and month-long offsite inspections is insufficient to monitor all the transactions, which necessitates a more focused approach.

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A series of downgrades

Housing finance firms are non-banking financial companies whose main source of funds is loans from banks and debt raised from the market. Some of the companies are also allowed to accept public deposits just like conventional banks.

The threat of a default by housing finance companies has been looming ever since last year when, in the aftermath of the Infrastructure Leasing & Financial Services (IL&FS) crisis, the over-leveraged balance sheets of many players came to the fore.

The stress in the sector is reflected by the series of recent downgrades of debt papers issued by the companies to raise money.

Earlier this month, rating agencies downgraded the debt papers of Dewan Housing Finance Ltd (DHFL), forcing the housing finance company to stop accepting fresh deposits and renewing them, besides placing curbs on premature withdrawal of deposits.

The rating agencies cited the lack of progress in finding a strategic investor and the liquidity squeeze triggered by the IL&FS crisis for the rating downgrade. All this, despite the fact that DHFL has not defaulted on any of its liabilities and has repaid debt of nearly Rs 30,000 crore since September 2018.

DHFL has not only borne the brunt of the liquidity crisis, but its stock took an extra hit when a mutual fund sold one of the firm’s debt papers at a yield much higher than the existing price, triggering speculation about the company’s financial situation.

The other firms that are facing scrutiny include PNB Housing Finance, whose debt paper was placed on a credit watch by Care Ratings last month for its increasing share of corporate loans and the consequent vulnerability on account of the weakness in the real estate sector.

Continuing the spate of negative news for the housing finance sector, Reliance Home Finance’s long-term debt was downgraded to a default by a few rating agencies in April.

“Post September 2018, the NBFCs and HFCs faced severe liquidity crisis with reduced confidence from the investors and lenders,” Care Ratings said in a note dated 14 May.

September 2018 is when the companies owned by IL&FS started defaulting.

“The situation was particularly acute for standalone HFCs/wholesale focused NBFCs. Access to funds was affected as both banks as well as debt capital markets shied away from lending to the sector,” the note added.

“Given the situation, the affected NBFCs/HFCs slowed down disbursements substantially to conserve liquidity,” the Care Ratings note said. “Liquidity thus conserved and created through pool sell-downs is being used to service the existing debt and cover for the immediate two to three months’ period of limited availability of fresh funding.”

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