(Freepik)

Housing finance companies (HFCs) are seeking a wider pool of long-term funding beyond the National Housing Bank (NHB), particularly for affordable housing lenders, as bank funding remains largely short to medium term and access to longer-tenure capital remains limited, as per a report by FE.

Long-term funding is relatively expensive for HFCs, prompting them to rely on shorter-tenure borrowings to protect profitability, industry executives said.

“NHB can fund up to 35% of an HFC’s incremental portfolio. Lenders can also raise capital through non-convertible debentures, but access to the bond market is largely restricted to higher-rated institutions. Smaller HFCs face greater funding constraints,” a source said.

The source added that while the RMBS Development Company Ltd (RDCL) mechanism has been introduced to deepen access to long-term funds, it has been used only twice so far. RDCL, a subsidiary of NHB, was set up to develop the residential mortgage-backed securities market and facilitate securitisation of housing loans.

Calling for a broader and more diversified funding base, Sukesh Bhowal, MD and CEO of Motilal Oswal Home Finance, said long-term funding avenues for affordable housing should be widened beyond NHB by drawing in insurance companies, pension funds and other institutions.

“Incentives such as tax benefits could encourage them to participate,” Bhowal said. He also stressed the need to create additional low-cost refinance avenues, apart from NHB, focused on affordable housing.

The source cited above said existing provisions allow insurance companies and pension funds to invest in long-term bonds, but such instruments need to gain wider acceptance. “I hope that over the next two to three years this will pick up because any new instrument faces some initial resistance from investors,” the source said.

However, access to funding is not uniform across the sector. Jinay Gala, director at India Ratings and Research, said HFCs rated AA and above continue to have adequate access to bank and capital-market funding, with the challenge more pronounced for smaller lenders seeking longer-tenure funds.

“Any entity which is AA rated and above has good access to funds from the capital market as well as banks,” Gala said.

Domestic lenders typically provide funding for three to five years, while HFCs seeking longer-tenure capital can turn to development finance institutions (DFIs), Gala said. “DFIs are the only route for now,” he said, adding that overseas borrowing also entails hedging costs.

Bank credit to HFCs has accelerated sharply in recent months, rising 21% year-on-year to Rs 3.82 lakh crore in July, compared with growth of just 0.2% a year earlier, according to the Reserve Bank of India’s sectoral deployment of bank credit data.

Despite the sharp increase in bank funding, industry executives said access remains skewed towards larger, better-rated HFCs, while the tenor of bank loans remains relatively short. For smaller and affordable housing lenders, this leaves a continuing need for diversified sources of long-term capital.