The Reserve Bank of India (RBI) today proposed changes in the regulatory framework for Housing Finance Companies (HFCs).

The proposed rules call for a clear demarcation between loans towards homes and other types of loans, define systemically important HFCs, propose doubling of net owned funds threshold, and seek to forbid an HFC from lending simultaneously to a construction company as well as individual home buyers in that project, within its group.

The central bank suggested these changes after the government transferred regulation of HFCs from the National Housing Bank (NHB) to RBI effective August, 2019.

The regulator has sought public comments on the proposed changes by July 15, after which it will issue the final guidelines.

The following changes have been proposed by RBI :

1. Housing Finance/Providing Housing for Finance Definition

‘Housing Finance” or “providing finance for housing” is proposed to be defined as financing, for purchase/ construction/ reconstruction/ renovation/ repairs of residential dwelling units. All other loans including those given for furnishing dwelling units, loans given against mortgage of property for any purpose other than buying/ construction of a new dwelling unit/s or renovation of the existing dwelling unit/s, will be treated as non-housing loans, it said.

2. Defining ‘principal business’ and ‘qualifying assets’ for HFCs

To qualify as a housing finance company, RBI has proposed that no less than 50 percent of net assets would have to be in the nature of ‘qualifying assets’ for HFCs (as explained in Point 1 above), of which at least 75 percent should be towards individual housing loans.

It defined “Net assets” as total assets other than cash and bank balances and money market instruments.

HFCs which do not fulfil the above criteria will be treated as NBFC – Investment and Credit Companies (NBFC-ICCs) and will be required to approach RBI for conversion of their Certificate of Registration from HFCs to NBFC-ICC. RBI also said it would allow a phased timeline to HFCs which do not currently fulfil the qualifying assets criteria, but wish to continue as HFCs in future.

3.Systemically and non-systemically important HFCs

The existing HFC regulations are common for all HFCs irrespective of their asset size and ownership. Now, RBI proposes to issue HFC regulations by classifying them as systemically important and non-systemically important, so as to introduce a graded approach as applicable to NBFCs in general.

Any non-deposit taking HFCs (HFC-ND) with asset size of Rs 500 crore and above, and all deposit-taking HFCs (HFCD) will be treated as systemically important HFCs.

HFCs with asset size below Rs 500 crore will be treated as non-systemically important HFCs (HFC-non-SI).

4. Minimum Net Owned Fund (NOF)

RBI has proposed to increase the minimum NOF requirement for HFCs to Rs 20 crore from Rs 10 crore currently. For existing HFCs, the glide path would be to reach Rs 15 crore within 1 year, and then Rs 20 crore within 2 years.

5. Group entities engaged in real estate business

In order to address concerns on double financing due to lending to construction companies in the group and also to individuals purchasing flats from the latter, RBI has proposed that HFCs be allowed to lend only at one level.

That is, the HFC can either undertake an exposure on the group company in real estate business or lend to retail individual homebuyers in the projects of group entities, but not do both. If the HFC decides to take any exposure in its group entities (lending and investment) directly or indirectly, such exposure cannot be more than 15 percent of owned fund for a single entity in the group and 25 percent of owned funds for all such group entities.

6.Implementation of Indian Accounting Standards

Norms for Implementation of Indian Accounting Standards for NBFCs currently will be extended to HFCs as well, RBI said. It also proposes to harmonise certain major differences between extant regulations of the HFCs and for NBFCs over 2-3 years. For instance, the risk weight classifications, and Income Recognition, Asset Classification and Provisioning (IRACP) norms are different across NBFCs and HFCs, which are proposed to be aligned.

7. Capital requirements (CRAR and risk weights)

The minimum Capital requirements (CRAR and risk weights) prescribed for HFCs currently is 12 percent. RBI proposes to progressively increase this to 14 percent by March 31, 2021 and to 15 percent by March 31, 2022, it said.

8. RBI has also proposed to align the definitions of capital (both Tier I and Tier II) of HFCs with that of NBFCs

9. Any amount received from NHB or any public housing agency is proposed to be exempt from the definition of public deposit.

10. RBI rules on Liquidity Risk framework and Liquidity Coverage Ratio for NBFCs to apply to HFCs with asset size greater than Rs 100 crore, and to all deposit-taking HFCs

11. Lending against shares, fraud monitoring, securitisation guidelines for NBFCs are proposed to be applied to all HFCs

First Published:Jun 17, 2020 7:08 PM IST