RBI Draws Out Certain Exemptions From Housing Finance Companies

Shubham Chauhan

05 Dec, 2019

RBI withdraws certain exemptions granted to Housing Finance Companies

HFCs will have to create a reserve fund like every NBFC

The Reserve Bank of India (RBI) has withdrawn certain exemptions granted to Housing Finance Companies (HFCs). Currently, HFCs are exempted from the provisions of Chapter IIIB of Reserve Bank of India Act, 1934. However, as per RBI’s notification, it has been decided to withdraw these exemptions, which puts the regulations of HFCs at par with Non-Banking Financial Company (NBFCs).

This decision came after the Finance Act, 2019 amended the National Housing Bank Act, 1987, which granted certain powers for regulations of HFCs with RBI.HFCs are currently exempt from the Chapter IIIB of RBI Act, 1934. However, it has been decided to withdraw these exemptions and make the provisions of Chapter IIIB of Reserve Bank of India Act, 1934.

Housing Finance Companies Current Situation

The Real Estate sector in India is proliferating. It is the second-largest sector in employment generation in India. Indian Housing Finance is no longer dependent solely on government-provided services like it used to be during the 1970s. The scenarios have changed now and this sector is becoming more and competitive with every passing year. There are around 45 housing finance entities providing housing loans worth Rs 781,000 million to homebuyers across the country.  

India’s Finance Minister Nirmala Sitharaman in her maiden budget speech in July had proposed an amendment to Section- 45IA of the RBI Act, 1934 in the Finance Bill. Later on 13^th August, RBI announced that Housing Finance Companies would be treated as a category of non-banks.

Another exemption has been drawn out from HFCs which is in regard to the creation and maintenance of a reserve fund. After RBIs notification, it has become mandatory for Housing Finance Companies (HFCs) to create a reserve fund like every NBFC. Housing finances have to transfer a minimum of 20% of its net profit every year to the reserve fund before any dividend is declared.

Moreover, RBI from now on can inspect any HFC to verify the correctness and completeness of any statement provided to RBI.

Housing Finance Companies are now barred from appropriating sum from the reserve fund unless there is a special direction from the Reserve Bank of India (RBI). These entities have to report such appropriations within 21 days, from the date of such withdrawal.

Conclusion

After the withdrawal of certain exemptions granted to HFCs, these entities will be treated as one of the categories of  non- banking financial companies (NBFCs) for regulatory purposes. The Reserve Bank of India will carry out a review of the existing regulatory framework applicable to HFCs and come out with revised regulations in due course.

Also Read: Housing Finance Company Registration