Framework for Housing Finance Companies as per RBI

Ashish M. Shaji

14 Jul, 2020

Reserve Bank of India has invited comments from stakeholders by July 15 on the same. The RBI proposed guidelines related to Housing Finance Companies (HFCs). RBI has also invited comments from stakeholders by July 15 on the same. The RBI, while releasing the proposed changes in the regulatory framework, stated that the step should strengthen the capital base of small HFCs.

RBI’s proposed changes to be prescribed for Housing Finance Companies (HFCs)

Changes proposed to be prescribed for HFCs are as follows:

• Defining principal business and qualifying assets for HFCs;
• Defining “providing finance for housing” or “housing finance”;
• Classification of HFCs as systematically important where asset size is Rs 500 Crore and above and non-systematically important where asset size is less than Rs 500 Crore; and
• RBI’s direction on Liquidity Risk Framework and Liquidity Coverage Ratio, securitization, etc. for NBFCs to be applicable to HFCs.

Law for the regulation of Housing Finance Companies

With a view to avoiding dual regulation, HFCs were granted exemptions from the Chapter IIIB of the RBI Act, 1934^[1] under a notification by exercising the powers under section 45NC of the RBI Act, 1934. As the regulations of HFCs were transferred to RBI, it was decided to withdraw these exemptions, and the provisions of Chapter IIIB except section 45-IA of the RBI Act is made applicable to all HFCs.

 It seems to be a professional where a transition is made to the RBI, and it would turn out as a change for better.

Defining “providing finance for housing” or “housing finance”

The term “providing finance for housing” or “housing finance” means financing for purchase or construction or reconstruction or a renovation or repairs of residential dwelling units which includes the following:

• Loans to individuals or a group including co-operative societies for construction or purchase of new dwelling units;
• Loans to individuals for purchasing old dwelling units;
• Loans to individuals for purchasing old or new dwelling units by mortgaging existing dwelling units;
• Loans to individuals for purchasing plots for construction of residential dwelling units provided a declaration is obtained from the borrower that he or she intends to construct a house on the plot in three years period from the date of availing the loan;
• Loans to individuals for renovation or reconstruction of existing dwelling units;
• Lending to public agencies (state housing boards) for construction of residential dwelling units;
• Loans to corporate or government agencies;
•  Loans for constructing educational, health, cultural, social or other institutions which are part of the housing project in the same complex and that are crucial for the development of settlements or townships;
• Loans for construction of houses/infrastructure within the same area meant for improving slum areas for which credit can be extended directly to slum dwellers on the guarantee of government or indirectly through the State Governments;
• Loans provided for slum improvement schemes to be implemented by slum clearance boards and other public agencies; and
•  Lending to builders for constructing residential dwelling units.

Other important changes envisaged by RBI for Housing Finance Companies

RBI has intended to increase NOF (Net owned Fund) for Housing Finance Companies from Rs 10 Crore to Rs 20 crore, and the gliding will be increased systematically over a period of time for upgrading their capital structure. A period of 1 year to reach Rs 15 crores and two years to reach 20 crores has been proposed.

Other changes are as mentioned below.

• Non-deposit taking NBFCs with asset size of more than Rs 100 crore, systematically important core investment companies and all deposit-taking NBFCs (except for Type1 NBFCs-NDs, Non-operating financial holding companies and Standalone Primary Dealers) were advised to follow the guidelines as specified in NBFC (PD) CC No. 102/03.10.001/2019-20 dated 4^th November 2019.
• It has been proposed to extend these guidelines to all non-deposit taking HFCs with an asset size of more than Rs 100 crore and all deposit-taking HFCs. Action taken under the above-mentioned conditions will fall under RBI supervision.
• Monitoring fraud has been the function of NHB until now, but this will change, and RBI shall ensure the supervision in terms of Master direction on monitoring of frauds in NBFCs (Reserve Bank) Directions, 2016.
• The Reserve Bank of India is expected to guide HFCs in dealing with frauds in banks and help them.

Implementation of Indian Accounting Standards (Ind AS)

Ind AS implementation has been implemented in NBFCs facilitating their growth as a powerful financial institution as per IFRS (International Financial Reporting Standards) instructions.

Housing Finance Companies too, would be facing the same implementation of accounting standards, especially in respect of:

• Capital requirements;
• Income recognition, asset classification, and provisioning norms;
• Norms on the concentration of credit/ investment;
• Limits on exposure to Commercial Real Estate and Capital Market; and
• Regulations on acceptance of public deposits.

Conclusion