In yet another spell of reforms, the Reserve Bank of India has come up with a strong prescription for housing finance companies (HFCs). This time, it is a new charter that will redefine the future roadmap of not only HFCs but also the housing sector. The RBI has chosen to boost the regulatory framework that will make HFCs both resilient and vibrant.

With a view to improve the regulatory framework of HFCs, the Central Government transferred the regulatory powers over HFCs from the National Housing Bank (NHB) to the RBI, effective August 2019.

In order to bring HFCs on a par with NBFCs and ensure more coherence to the business of housing finance, the RBI proposed changes in the regulations applicable to HFCs.

The RBI aims at increasing liquidity, bettering risk management and enhancing governance with these guidelines. These regulations have been effected against the backdrop of issues faced by non-bank lending institutions due to economic slowdown, the Covid pandemic and challenges in the real estate and construction sectors.

Out of the around 102 HFCs currently operating in India, the smaller ones, which account for about 30 per cent of the market share, are expected to be affected by these guidelines.

Terms defined

The recent instructions issued by the RBI in respect of HFCs have brought more precision to the term ‘housing finance’ which was previously not defined under the National Housing Bank Act, 1987. The RBI has now defined both ‘housing finance’ and ‘housing finance company’; consequently, eliminating the ambiguity to provide a fair structure.

By doubling the ‘net owned funds’ (NOFs) from ₹10 crore to ₹20 crore, the RBI has intended to strengthen the capital base, especially of the smaller HFCs. Any HFC that is unable to increase its NOFs will be converted to an NBFC-Investment and Credit Company (NBFC-ICC), which has an NOF requirement of ₹2 crore.

The NBFC-ICC is a recently merged category of NBFCs, the principal business of which — as defined by the RBI in its ‘Master Directions’ — is asset financing that does not fall in any other category. With growing dependence and inclination towards information technology, the RBI has made ‘Master Directions’ on the IT Framework for NBFCs pertinent to housing finance companies. This implies that as the industry develops, the information technology practices will need to be litmus tested against the best practices and industry benchmarks.

Furthermore, in order to monitor the credit system, the ‘Master Directions on Monitoring of Fraud’ will have a bearing on HFCs. This will enable the HFCs to take a greater responsibility with more accountability.

By applying ‘loan-to-value’ (LTV) ratio ( which compares the value of loan one borrows against the total value of the property being purchased), similar to NBFCs on security of shares to HFCs, the apex bank has tried to reduce the impact of volatility and ensure adequate cover for lending against securities.

Further, the extant guidelines for gold loans, as mentioned in the ‘Master Directions’ for NBFCs, now having a relevance to HFCs as well, increases the LTV ratio for gold loans. This will provide impetus to security-backed lending. As a step towards bringing parity between NBFCs and HFCs and as a measure of consumer protection, prepayment or foreclosure charges will not be levied on any floating rate term loan other than one meant for business purposes.

These explicit rules for assignment of mortgage-backed securities will streamline the process of securitisation for HFCs.

Code of conduct

More discipline has been introduced for following the code of conduct and managing the risk of outsourcing financial service activities by HFCs. To protect against potential liquidity disruptions and to promote resilience of HFCs, the guidelines on liquidity risk management and liquidity-coverage ratio have also been reserved for HFCs.

The RBI has also restricted the exposure of HFCs to individuals and group companies engaged in real estate business, which is generally considered risky. This, however, gives an edge to NBFCs and banks over HFCs.

Considering the impact, the regulatory framework has put more emphasis on the board of directors to oversee governance and efficiencies in HFCs. This move is expected to give perspicuity to conducting the business of housing finance while bringing a sense of discipline.

It aims to prune ailing HFCs either by spurring them to raise their capital base or by turning them into NBFCs. Such initiatives taken by the RBI and lending by NHB, to a great extent, have addressed the liquidity crunch faced earlier by the non-bank lenders.

These regulations are also seen as concerted efforts by the Central Government and the RBI to aid and monitor the housing finance market, and by extension, the real estate industry which happens to be the second largest employer, involving both the organised and unorganised sectors.

These will be a stepping stone towards providing a further fillip to the housing sector and stimulating demand generation in the economy.

The writer is Executive Chairman, Capital India Finance Ltd, and ex-Chairman, NABARD. The views are personal