It asked them to pass on interest rate increases gradually and to take into account the impact on both existing and prospective borrowers at a meeting this week with chief executives of HFCs.

“We are sounding a note of caution to the HFCs. With interest rates moving up, most of the lenders are going to be impacted as almost 85% of the loans are on floating (interest) rate,” R.V. Verma, NHB chairman and managing director, said in an interview. “Lenders should closely watch the situation as the repayment capacity of the people, who are almost on the threshold, will be impacted.”

HFCs borrow from banks and the market to meet lending requirements. The Reserve Bank of India has raised rates 11 times since March 2010 to rein in inflation.

“HFCs can press their spreads, but it will not be easy as margins are already under pressure,” Verma said.

The regulator has asked the lenders to take a “calibrated” view on increasing interest rates as it may impact both new and old business. “Due to higher rates of interest, customers may postpone their property buying decision. That means no new incremental business for the HFCs,” Verma said.

“In terms of old business, the asset quality may be impacted. So, HFCs could be losing on both fronts.”

India’s 54 HFCs have a 35% share of the total housing loan portfolio. The average lending rate is 11%.

“Till now, the situation is contained,” Verma said. “So, from a systemic point of view, we don't see any risk. But going forward, if there are a couple of more hikes, it’s possible delinquencies may start showing up in the companies’ books.”

The larger lenders are likely to face a greater impact than the small and medium ones, he said.

“The middle-level and smaller ones have very high capital adequacy and are still building their business,” Verma said. “But for larger companies, the impact will be more as they have a big portfolio of existing loans.”

Still, the companies have enough of a buffer, he said.

“The companies are fully cushioned, both in terms of capital adequacy and provisioning,” Verma said.

The ratio of non-performing assets to loans is around 1% for HFCs.

Rising interest rates haven’t had an impact on asset quality, said Anil Sachidanand, chief executive officer of Dewan Housing Finance Corp. Ltd.

“The quality of assets to a large extent depends on the quality of the origination,” he said. “We do adequate due diligence while sanctioning loans.”

Interest rates levied by HFCs have risen to 11-11.25% from 8.5% in the past year, raising monthly instalments, said Anil Kothuri, executive vice-president at Edelweiss Housing Finance Ltd, which entered the business recently.

“The impact will especially be felt in the lower segments, where the average ticket size is less than Rs. 10 lakh,” Kothuri said.