HFCs Scout for People and Technology to Manage Risk

MDs and CROs of Housing Finance Companies Discuss Current Trends in Risk Management:

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The National Housing Bank (NHB) has recently asked all housing finance companies (HFCs) with more than `50 billion in assets to appoint chief risk officers, citing the need for strengthening risk management practices in the industry. The directive comes in the wake of some HFCs and NBFCs facing liquidity issues after the IL&FS defaults came to light, underscoring the mismatches between assets and liabilities in this sector. As per the NHB directive, the CRO is required to function independently to ensure the highest standard of risk management. NHB stipulates that the CRO, who will have voting power in credit sanction proposals, should be a senior officer with adequate professional qualifications and experience. Boards of HFCs can appoint CROs for a fixed tenure. Her/his role in deciding credit proposal will be limited to that of an advisor and will be involved in the process of identification, measurement and mitigation of risk.

TOP RISKS

HFCs today face risks involving liquidity, credit, ALM, operational and lack of funding. The availability of funds for HFCs has reduced significantly from all sources and this further restricted the ability for fresh lending and maintaining of healthy book sizes.

Deepak Patkar, group CRO at Magma Fincorp and Magma Housing Finance explains the top risks faced by HFCs: “The asset liability mismatch, or ALM, risk is a crucial risk. Prudent HFCs have started correcting their positions of mismatch over the last 3-4 quarters. The liquidity crisis has slowed down that process, which could lead to stress on cash flows in the short to medium term. Another major risk is the one associated with construction/builder financing. With banks becoming allergic to even reputed real estate developers,