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NHB
guidelines for HFCs
Alok Agarwal
13 October 2001
 Mumbai:
With a view to bring world class practice, the National Housing
Bank (NHB) plans to introduce asset-liability management
guidelines for housing finance companies (HFCs) by the end of
fiscal 2002.
The RBI has already
instructed non-banking finance companies to install
asset-liability management systems by the end of fiscal 2002,
which are already in place for banks and financial institutions.
Speaking at a seminar on
‘risk management on housing finance,’ NHB executive director
Radhey Shyam said draft guidelines on the issue have been
circulated to HFCs and once approved, they will address the issue
of interest rate risk in evaluating asset liability management.
“The initial focus of the asset liability management function
will be to enforce discipline of market risk management.”
He outlined some common
risks, in mortgage finance business as default risk,
asset-liability mismatch, interest rate risk and pre-payment risk.
Elaborating on the
pre-payment risk factor Shyam said as against the average period
of housing loan of 15 years, borrowers all over the world have a
tendency of making prepayments in eight to ten years in line with
the falling rate of interest. “Therefore, HFCs will have to
remain prepared for such eventualities.”
He also said that HFCs
borrow short and lend long as housing finance loans are generally
for a period of 15 years or more. “Therefore, there is a need to
avoid asset-liability mismatch. For this, modern techniques of
interest rate risk measurement, including analysis of factors like
duration gap, simulation and value of risk over a period of time,
needed to be introduced.”
Shyam said NHB is hoping
that amendments to the National Housing Bank Act in terms of
foreclosure laws  would
happen in the near future, which would be a beneficial to HFCs.
“If it happens, then HFCs would be able to sell properties of
default to borrowers and recover their dues. The advent of such
amendment would also result in bringing down non-performing assets
and discourage willful defaulters.”
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