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The Reserve Bank of India has proposed to overhaul rules governing housing finance companies, including classifying them based on their asset size; banning them from lending simultaneously to a construction company and individual home buyers in the same project; and setting clear exposure targets for them to qualify as a housing finance company.
The proposed changes in the regulatory framework comes in the backdrop of troubles facing housing finance companies such as Dewan Housing Finance Corporation Ltd and Reliance Home Finance.
Definition of HFC
This is the first set of guidelines issued by the RBI since it took over the regulations of the housing finance companies (HFCs) from the National Housing Bank (NHB) in August 2019. The central bank defines housing finance companies as those entities with an exposure of at least 50 per cent of net assets in housing-related activities like construction, renovation, purchase of dwelling units. Of this exposure, at least 75 per cent should be towards individual housing loans. Net assets mean total assets other than cash and bank balances and money market instruments.
This criteria could have implications for existing HFCs that have large exposure to developer financing and loan against property.
As part of its move to align regulations of HFCs with that of non-banking finance companies (NBFCs), the RBI proposes to double the minimum net-owned funds requirement for HFCs to ₹20 crore. For existing HFCs, the glide path would be to reach ₹15 crore within one year and ₹20 crore within two years.
The central bank reasoned that this step is aimed at strengthening the capital base, especially of smaller HFCs and companies proposing to seek registration under NHB Act.
Double financing
To address concerns on double financing due to lending to construction companies in the group and to individuals purchasing flats from the latter, the RBI said the HFC concerned may choose to lend only at one level. What this means is that the HFC can either undertake an exposure to the group company in real estate business or lend to retail individual home buyers in the projects of group entities, but not to both. This could have implications for Tata group and Mahindra group as they have presence in both real estate and housing finance.
“The RBI has proposed to align some of the regulations of HFCs with those of NBFCs. The draft regulations are a welcome move and will serve the long-term interests and purpose of HFCs. The RBI has proposed to relax norms like allowing perpetual debt instruments as part of capital. Proposals for increasing the minimum net-owned fund to ₹20 crore and the tightened criteria for qualifying assets are very good for the development of housing finance and housing finance companies. It has clarified the purpose of housing finance,” said Deo Shankar Tripathi, MD and CEO of Aadhar Housing Finance.
What the proposed framework says
Housing-related activities should account for at least 50% of the assets of an HFC
75% of this should be individual housing loans
An HFC’s minimum net-owned fund should be ₹20 crore
An HFC should choose between lending to a group company engaged in realty business and lending to retail individual buyers
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