MUMBAI: Housing finance companies (HFCs) are set to experience reduced borrowing costs following the National Housing Bank’s (NHB) approval of partial credit enhancement (PCE) for bonds they issue. This initiative aims to enable HFCs to pass on the benefits of lower funding costs to borrowers, particularly those in the affordable housing sector.
In a letter dated October 6, the NHB notified housing finance companies that it would offer PCE on secured non-convertible debentures (NCDs) they issue, with the goal of helping them “diversify their funding sources” and “reduce reliance on banks.”
The NHB stated that the facility would only be available to non-deposit taking HFCs with a minimum asset size of ₹1,000 crore and a credit rating of at least ‘A+’ from two credit rating agencies. Additionally, HFCs must maintain gross and net non-performing asset ratios below 2.5% and 1.5%, respectively, to qualify.
“To attract investors with competitive rates, issued bonds or debentures should have sufficient ratings,” the letter noted. “Many HFCs struggle to issue bonds due to lower credit ratings from agencies, often caused by asset-liability mismatches.”
The NHB will impose an annual PCE fee based on the bond’s pre-enhanced credit rating: 25 basis points for AA+, 50 bps for AA/AA-, and 100 bps for A+. An additional 2% fee applies in the event of rating downgrades or defaults.
The enhancement will cover up to 50% of the bond issue’s size, with a minimum issuance of ₹50 crore. The bonds must have a tenure of three to five years and can only be used to refinance existing debts. HFCs are required to provide a statutory auditor’s certificate within seven days of receiving the proceeds.
The PCE, extended as an irrevocable contingent line of credit, is anticipated to boost the external credit rating of the bonds, enabling HFCs to secure funds at more competitive rates.
