Reserve Bank of India proposes tougher rules for housing finance companies

KOLKATA: The Reserve Bank of India has proposed tougher rules for housing finance companies (HFC), including lending and investment curbs in group entities to prevent conflict of interest, while changing the definition of "housing finance" and setting thresholds to identify the bigger players that are systemically important to the mortgage industry.
The central bank said that HFCs can either take exposure on the group company in real estate business or lend to retail individual home buyers in the projects of group entities, but not do both.

This is aimed at addressing the “concerns on double financing due to lending to construction companies in the group and also to individuals purchasing flats from the latter,” RBI said in a draft regulation. “As regards extending loans to individuals who choose to buy housing units from entities in the group, the HFC would follow arm’s length principles in letter and spirit.”

It added that HFCs’ exposure (lending and investment) cannot be more than 15% of owned funds in a single entity in the group and 25% of owned funds for all such group entities.

In parallel, RBI looks to change the definition of "housing finance" and proposed to include loans to builders for construction of residential dwelling units, schools and hospitals within its purview, while excluding loans against property from it. RBI added that a minimum 50 percent of net assets of HFCs should be "housing finance".

It suggested a four-year timeline to build an individual loan portfolio, which would be at least 75% of the housing finance book. In case of failures to maintain such ratios, the HFCs would be treated as NBFC – Investment and Credit Companies (NBFC-ICCs).

RBI also said that existing home loan lenders would need to double their minimum net owned fund to Rs 20 crore in two years. “This step is aimed at strengthening the capital base, especially of smaller HFCs and companies proposing to seek registration under NHB Act,” it said.

These are part of a slew of measures the central bank proposed to align regulations with those of non-banking finance companies. It has placed a draft Tuesday on its website, seeking public comments by July 15.

“RBI has proposed to align some of the regulations of HFCs with those of NBFCs," said Deo Shankar Tripathi, MD of Aadhar Housing Finance.

The regulator said non-deposit taking HFCs with asset size of Rs 500 crore and all deposit taking HFCs irrespective of asset size should be be treated as systemically important. The perpetual debt instruments (PDI) would be considered as part of Tier I and Tier II capital for non-deposit taking systemically important players.

The proposals include asking HFCs to follow the liquidity risk framework and securitisation rules as applicable for other non-banking finance companies. The rules related to lending against the collateral of listed shares would also be followed.

RBI took over regulation of HFCs from the National Housing Bank (NHB) and accordingly, a review of the extant regulatory framework applicable to HFCs was in order.

The central bank, which directly regulates HFCs since August last year, suggested clarity in HFCs’ principal business asking them to make a minimum half of their net asset in housing finance and proposed inclusion of loans to developers for construction of residential units or schools etc under home loans.