There was no regulatory arbitrage between banks and housing finance companies (HFCs), according to R.V. Verma, Chairman and Managing Director of National Housing Bank (NHB).

Speaking to Business Line on Sunday, Verma said that the business model of specialised HFCs was different from that of banks and it calls for “specialised regulation” focusing on “innovation, personalisation and efficiency in both services and pricing”.

His comments come just a day after the SBI Chairman Pratip Chaudhuri pitched for a single regulator for all housing loans to bring down the regulatory arbitrage between banks and HFCs.

Chaudhuri also suggested that the Reserve Bank of India (RBI) could serve as the sole regulator for all loans including home loans.

Currently, RBI regulates the housing loans provided by banks while NHB is the regulatory body for home loans disbursed by HFCs.

There are nearly 57 HFCs together accounting for a little over 30 per cent of the Rs 7 lakh crore housing loan market.

“There is no question of a regulatory arbitrage. In fact two of the directors on the board of NHB are from RBI. There is a constant process of interaction, co-ordination and cross fertilisation of ideas,” Verma said.

Unified Regulator

Verma, however, refused to comment on the issue of a single regulator “dealing with both prudential and market conduct aspects for the medium run” as suggested in the final report of the Financial Sector Legislative Reforms Commission.

He also reserved his comments on the proposal of transfer of the registration and regulation related powers of the NHB over HFCs to the RBI as suggested in the National Housing Bank (Amendment) Bill, 2012 saying that the issue was under “legislative jurisdiction”.

The Bill, once passed, would lead to NHB focusing on supervision and financing of HFCs.

NHBs role

The NHB Act of 1987 was amended in 2000. Explaining the need for a special regulator for HFCs, he said that when the NHB Act was formulated, the compulsions were different.

“There was a huge shortage of housing loans and banks were not willing to look at the sector as they considered it risky and also because they had other areas to focus on,” he pointed out.

With NHB taking over the regulation of HFCs there was a paradigm shift from home loans being a government activity to becoming a bankable and commercially viable model, he said and added, “In fact looking at the way the balance sheet of HFCs grew, banks started emulating the model in early 2003.”

According to Verma, while banks and NBFCs were multipurpose in nature, specialised HFCs need to be treated differently.

“As regulator we looked at the inherent risks in the business and devised new products like the credit risk guarantee fund trust for low income housing and rural housing fund to name a few.”

Retail housing loans as a percentage of GDP in India was still low at 8-9 per cent as compared to that in the US where it is close to 30 per cent. “The demand is huge and is growing at over 18 per cent. A peaceful co-existence of both the structures (HFCs and banks) by ensuring there is no regulatory arbitrage is needed to ensure growth,” he said.

Teaser Loans

According to Keki Mistry, Vice-Chairman and CEO of HDFC Ltd, HFCs had to make similar provisions on such loans. HDFC, for instance, had made provisions of around Rs 400 crore on dual rate loans.

According to Mistry, the regulations of HFCs and banks were very similar on various issues ranging from loan-to-value ratio and risk weights on loans among others.

“There is no regulatory arbitrage. The regulations for HFCs and banks are exactly same and in fact sometimes more stringent for HFCs. For instance, HFCs were the first ones to waive off pre-payment penalty on home loans and banks followed suit later,” he said.

>shobha.roy@thehindu.co.in

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