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National Housing Bank (NHB) extended a partial credit enhancement scheme to housing finance companies (HFCs) to help reduce their cost of funds and promote the flow of cheaper loans in the affordable housing sector. The support is conditioned on eligibility criteria such as asset size, credit ratings and non-performing asset limits. By covering up to half the bond issue value, NHB's move is expected to improve external ratings and enable HFCs to raise debt more competitively, benefitting end borrowers in the affordable housing segment.
In a recent development, the National Housing Bank has agreed to provide partial credit enhancement (PCE) support to bonds issued by eligible housing finance companies. The primary objective behind this is to enable HFCs to diversify their funding sources and lessen their over-dependence on banks. Advertisement
Under the scheme, only non-deposit-taking HFCs with an asset size of at least ?1,000 crore-and holding a minimum credit rating of A+ from two agencies-qualify. They must also keep their gross and net non-performing assets under 2.5 % and 1.5 %, respectively.
The PCE will be applied to secured non-convertible debentures (NCDs). For the enhanced bond issues, NHB will levy an annual fee tied to the pre-enhanced credit rating: 25 basis points for AA+, 50 basis points for AA/AA-, and 100 basis points for A+. An additional 2 % charge will apply if there's a downgrade or default by the HFC.
Up to 50 % of any bond issue may be supported under this scheme, subject to a minimum issue size of INR 50 crore. Bond maturities must fall between three and five years, and issuances should solely be used to refinance existing debt. HFCs will also be required to submit a certificate from a statutory auditor within seven days of receiving the proceeds.
The enhancement will act as an irrevocable contingent line of credit, thereby improving the perceived creditworthiness of the bond. With an improved external rating, HFCs are expected to access funds at more attractive rates-savings which they can pass on to affordable housing loan customers.
By extending partial credit enhancement to qualifying HFCs, NHB has laid the groundwork for reduced borrowing rates in the affordable housing sector. The structure of the scheme - with caps, eligibility norms and usage restrictions - ensures prudence and safeguards against misuse. Should HFCs leverage this support effectively, they could issue bonds at more favourable terms, ultimately allowing them to reduce interest rates for end-users seeking affordable housing. Over time, this intervention may help broaden access to housing finance and strengthen the financial backbone of the affordable housing segment.
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