Higher capital adequacy for HFC’s muted

  1. National Housing Bank (NHB),regulator of Housing finance companies(HFC’s) has proposed to increase the capital adequacy ratio of housing finance companies (HFCs) HFC’s to 15% in a phased manner.The proposed norms are being issued in the wake of liquidity problem being faced by HFCs after IL&FS crisis.
  2. As per the proposed roadmap,HFCs have to increase minimum Capital Adequacy Ratio (CAR) to 13% by March 31,2020 and 14% by March 31, 2021.
  3. Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.The risk weighted assets take into account (a)credit risk (b)market risk and (c)operational risk.
  4. The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.
  5. NHB is an All India Financial Institution(AIFl), set up in 1988, under the National Housing Bank Act, 1987.It has been established to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected with it.