Regulations for Housing Finance Companies Revised by RBI

The Re-Beginnan | Vol.2 | Issue 22

What’s the Deal?

On 22nd October, the regulatory framework for Housing Finance Companies (HFCs) has been revised based on the recommendations made in July 2020 as RBI replaced the National Housing Bank (NHB) as the regulator of mortgage lenders in August 2019. The category of regulations that will apply to home financers will now be of non-banking financial companies.

Dissecting the New Framework

- By 31st March 2024, 60 per cent of the total assets of an HFC should be towards housing finance.

- A minimum of INR 20 crore as net owned fund (NOF) has to be held by an HFC; a requirement for a company to carry on the business of housing finance as its principal business. This has been doubled from the previous requirement.

- To ensure resilience to survive any liquidity stress scenario lasting 30 days, HFCs shall now maintain a liquidity buffer in terms of Liquidity Coverage Ratio (LCR).

- A glide pathway has been prescribed by RBI where HFCs should constitute 40 per cent of total assets towards housing finance for individuals and 50 per cent of total assets towards housing finance and by March 2023 these percentages should rise to 45 per cent and 55 per cent, respectively.

- A board-approved plan has to be submitted by all HFCs to RBI stating the roadmap to fulfill the above-mentioned criteria and timeline for transition within 3 months.

- HFCs who’re unable to fulfill the above criteria will have to approach RBI for the conversion of their Certificate of Registration (CoR) from HFC to non-banking finance company — Investment and Credit Companies (NBFC-ICC).

- A HFC holding a CoR may continue to carry business even if their net owned fund is less than INR 20 crore. But such a company has to achieve a net owned fund of INR fifteen crore by March 31st, 2022 and INR 20 crore by March 31st, 2023. HFCs failing to achieve the same will be liable to cancel their Certificate of Registration as an HFC.

- A Loan to Value (LTV) ratio of 50 per cent has to be maintained for loans granted against shares by HFCs. HFCs will be required to maintain an LTV ratio not exceeding 75 per cent and put in place a board policy for lending against the collateral of gold jewelry.

- HFCs will not impose foreclosure charges/pre-payment penalties on any floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligations.

- HCF can either take an exposure on the group company in real-estate business or lend to retail individual homebuyers in the projects of group entities, but not both.

Conclusion

The revised regulations for housing finance companies aim to strengthen the capital base of small financing companies. They also aim to restrict lending by HFCs to construction companies or flat buyers of that company and to create a new category of important HFCs based on financial parameters.