Borrowers who have taken home loans from non-banking finance companies (NBFCs) and housing finance companies (HFCs) are a worried lot as the sector has been in the news for the wrong reasons. No borrower wants to hear about his property papers being mismanaged or disruption in loan disbursal or abrupt increase in interest rate. But is there a reason to be worried?
The Liquidity Problem
The biggest reason for the current crisis is the asset liability mismatch that India's shadow lenders are facing. They were giving long-term loans like home loans but did not have corresponding long-term funds.
A significant part of their funds came from commercial papers (CPs), which are short-term instruments with up to one-year maturity. Mutual funds were buying these, but after IL&FS defaulted in 2018, and many other NBFCs followed, mutual funds have not only almost stopped fresh investments into these CPs but are also reducing their exposure by selling at a discount.
"Risk aversion by lenders like mutual funds has resulted in an asset-liability mismatch. After the IL&FS crisis, there was nervousness in the markets and NBFCs were not able to borrow from banks. This accentuated the crisis," says C.S. Sudheer, Founder and CEO, IndianMoney.com.
Some lenders have deployed a bigger part of their funds in corporate and developer finance, and since there have been a number of defaults by real estate developers, most banks and mutual funds are unwilling to refinance such exposure. Those with greater retail exposure are relatively better off. The troubled lenders, whose only income is EMIs being paid by retail home loan borrowers, are finding this income significantly less than their short-term principal repayment obligations arising due to maturity of these CPs. With refinance options from banks and mutual funds drying up, they are facing a liquidity squeeze.
Are Your Property Papers Secure?
What happens to property papers if the lender is in distress? "We do not think that property-related papers are a big issue. Just like stamp duty is paid and property is registered with the government, while buying a property using a loan, the mortgage is also registered with the government. After registration, the institutions (lenders) take custody of the property documents. As soon as the borrower clears the outstanding loan, the institutions are bound to release the papers back to the borrowers," says Amar Pandit, Founder, Happyness Factory. So, unless you default on your repayments, your property papers are safe.
You can also set aside concerns about lenders going bankrupt. "In case of a severe crisis, weak NBFCs are likely to be taken over by the stronger ones. The RBI has eased the risk-weightage norms for banks (capital to be set aside by banks) for the rated loan exposure they have in NBFCs, which means funds will soon start flowing to NBFCs," says Sudheer. "So, your property papers are safe with NBFCs and HFCs. The weaker NBFCs will survive as consolidation takes place," he adds.
Addressing the NBFC liquidity crisis, the finance minister had stated in the Budget that banks would purchase Rs 1 lakh crore worth of high quality assets of NBFCs and HFCs in the current financial year. This will help reduce the liquidity stress to a large extent, especially after fund houses curbed their exposure to such debt. The RBI has now been given complete regulatory control over HFCs and stronger authority over NBFCs. It can intervene in their functioning, remove directors, supersede managements and even order mergers, if needed. So, in cases of distress, the central bank would come into the picture to ensure that operations of the institution are carried on normally, and interests of both depositors and borrowers are protected.
Troubled lenders stop fresh disbursals to new borrowers as a step to manage their liquidity, but they will keep servicing the old customers. "Even if the NBFC's fresh loan disbursal is paused, the existing customer's documents remain safe with the organisations. The service branches remain operational for them," says Rishi Mehra, CEO, Wishfin.
To meet their repayment obligation, most of these lenders have started selling their loan portfolios, mostly to banks. If your lender sells your loan to a bank, your existing lender will remain the collecting agent of the bank. As a borrower, you will not face any difference in terms of repayment and other services.
Stuck With Partial Disbursement?
Many borrowers have taken construction-linked home loans or are constructing on their own. Their loans may have been disbursed partially and the lender may not be giving further funds.
"In such a scenario, if the property is approved by other lenders and the profile is suitable as per a bank/NBFC, the loan should be transferred," says Mehra. Based on your credit profile and the profile of the property, if you can find a bank to take on the loan, then that is the best solution. Getting your loan refinanced in such a situation through a public sector bank could be challenging, so try private banks. If this option does not work, try the top HFCs.
Matter of Interest
While big NBFCs and HFCs have enough liquidity, they are not completely insulated from the crisis and their cost of funds may rise. They may attract you at lower rates, but, going forward, you may have to pay a higher rate compared to a loan from a bank. Banks are tightly regulated and have access to low-cost funds through savings account and current account deposits, which NBFCs do not have.
If you can transfer your loan to a bank, do so. "NBFCs and HFCs are offering higher rates of interest considering that their cost of funds is higher. Customers, if eligible for loans from banks and top NBFCs, can opt for balance transfer. This will help them reduce the interest outflow and increase the scope of getting additional funds as top-up loans," says Mehra.
What if you can't transfer to a bank? Banks typically deny a loan if a borrower's credit profile does not meet their requirements or there is some issue with the property. In such a case, NBFCs or small HFCs are the only option left even though their interest rates are higher. Such borrowers can try to transfer their loan to other HFCs or NBFCs. "There are NBFCs that support such customers. There is a gap in rate of interest between HFCs and NBFCs too. The smaller ones have higher rates. Hence, it's advisable to move to top NBFCs and HFCs with the loan to reduce the interest burden," says Mehra.
It will be a while before the liquidity crisis is resolved. If you have a home loan from an NBFC or HFC and paying a higher interest rate, look at transferring it to another lender.