Gross non-performing assets (GNPAs) of housing finance companies (HFCs) rose to 3.3% as on December 31, 2021, from 3.0% as on September 30, 2021, attributable to Reserve Bank of India’s (RBI) November 12, 2021, clarification¹ on recognition and calculation of NPAs, rather than any real mark-down in asset quality.

But for this, GNPAs would have been 2.6% in December (chart 1 in annexure) — meaning, the new way of calculating had a 70 basis points (bps) impact, a CRISIL Ratings study of 35 HFCs comprising ~95% of the industry’s assets under management, indicates. This is in line with our earlier estimates.

Put another way, without the change in rule, the portfolio quality of HFCs on-quarter — and on a like-to-like basis — would have shown an improvement of 40 bps.

While the RBI has, on February 15, 2022, deferred the implementation of the revised norms pertaining to upgradation of NPAs to September 30, 2022, this is unlikely to have much impact because most HFCs have already switched to the new way of calculating. Yet, they are well-positioned to improve their GNPA ratio to ~3% by the end of this fiscal.

The two RBI clarifications — on daily stamping of accounts, and upgradation of NPAs — have definitely impacted HFCs. However, the extent of this impact diverged based on asset class and borrower segment (chart 2 in annexure). Those with relatively more-vulnerable customer profiles, a higher proportion of affordable home loans, self-employed borrowers, and/or loans against property have been impacted more.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings Ltd, “Affordable housing finance companies² have seen a higher 140 bps impact on average due to the revised recognition norms. Their borrowers tend to have limited financial flexibility and volatile cash flows. Therefore, their bounce rates are higher typically. Also, most can’t repay their entire arears in one go, which could lead to stickier GNPAs in the segment.”

On their part, HFCs are trying to change borrower behaviour and reduce additional slippages into GNPAs. This, however, will lead to increased operational intensity as they beef up their collection efforts.

Says Subha Sri Narayanan, Director, CRISIL Ratings Limited “As many HFCs have already switched to the revised norms as per the November 2021 clarification, they are unlikely to revert to the previous regime, a flexibility now available as per the February 15 clarification. This is because the increase in reported GNPAs for many HFCs is not very significant and is more of an accounting, rather than an economic, impact. The required provisioning levels, too, have not been materially affected, as HFCs generally follow Indian Accounting Standards (IND-AS), where provisioning levels are typically higher compared with the IRACP requirements. Assuming they do not avail of this dispensation, overall GNPAs for the sector are expected to settle at ~3.0% by March 2022.”

Asset quality in the HFC sector is expected to remain better than other NBFC segments. Any further waves of the Covid-19 pandemic, and their spread, intensity and duration, will bear watching.

¹ RBI’s circular provided clarifications on income recognition, asset classification and provisioning (IRACP) norms for banks, non-banking financial companies (NBFCs) and all-India financial institutions
² Affordable housing finance companies are those with an average loan ticket size of Rs 15 lakh or less