Financial fragility in housing finance companies

Abstract

This study examines the financial fragility of the Non-Banking Housing Finance Companies (HFCs) sector. We show that the liquidity crunch in HFCs stemmed their over-dependence on short-term wholesale funding. While such reliance worked well in good times, it generated significant short-term debt rollover problems for HFCs during times of stress. The root cause of the inability of HFCs to roll over commercial paper (CP) subscribed by the Liquid Debt Mutual Fund (LDMF) sector was the exacerbation of the ALM problem due to asset side shocks. Anticipating defaults, investors in the CP market resorted to excessive redemptions, which, in turn, exacerbated the rollover risk of HFCs. We develop a robust tool (Health Score) to estimate financial fragility in an HFC and find that it can predict the constraints on external financing (or rollover risk) faced by these firms.