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2 November 2020
Alignment of the HFC’s regulatory framework with NBFC’s
 
The Finance (No. 2) Act, 2019 (23 of 2019) amended the National Housing Bank Act, 1987 (NHB Act) conferring powers for regulation of Housing Finance Companies (HFCs) with Reserve Bank of India (RBI), which came into effect from 9 August 2019 vide notification of the Government of India. On 13 August 2019, RBI issued a Press Release stating that pursuant to the amendments to the NHB Act conferring powers to the RBI, HFCs will henceforth be treated as one of the categories of Non-Banking Financial Companies (NBFCs) for regulatory purposes. Reserve Bank will carry out a review of the extant regulatory framework applicable to the HFCs and finalize revised regulations in due course. Further, on 12 November 2019, the RBI vide a notification, withdrew the exemption given to the HFCs from the applicability of Chapter IIIB of the Reserve Bank of India Act, 1934 (RBI Act) (except section 45IA of the RBI Act). 

Subsequently, on 17 June 2020, the RBI released the draft revised regulatory framework for HFCs, inviting public comments by 15 July 2020. The draft revised framework has now been finalized and notified vide Notification1 dated 22 October 2020.

The below paragraphs summarize the key changes proposed for the HFCs:
 
  Definitions of ‘Housing Finance Company’ and ‘Housing Finance’
 
  1. HFC has been defined as a NBFC whose financial assets in the business of providing finance for housing constitute at least 60% of its total assets (netted off by intangible assets), and out of the total assets (netted off by intangible assets), not less than 50% should be by way of housing financing for individuals. 
  2. ‘Housing Finance’ has been defined as the financing for purchase or construction or reconstruction or renovation or repairs of residential dwelling units (which includes loans given for specified purposes) which includes:
    1. Loans to individuals or group of individuals including co-operative societies for construction/purchase of new dwelling units; 
    2. Loans to individuals or group of individuals for the purchase of old dwelling units;
    3. Loans to individuals or group of individuals for purchasing old/new dwelling units by mortgaging existing dwelling units; 
    4. Loans to individuals for the purchase of plots for construction of residential dwelling units provided a declaration is obtained from the borrower that he intends to construct a house on the plot within a period of three years from the date of availing of the loan; 
    5. Loans to individuals or group of individuals for renovation/ reconstruction of existing dwelling units; 
    6. Lending to public agencies including state housing boards for construction of residential dwelling units; 
    7. Loans to corporates/ Government agencies for employee housing;
    8. Loans for construction of educational, health, social, cultural, or other institutions/centers, which are part of housing projects and which are necessary for the development of settlements or townships (see note below);
    9. Loans for construction meant for improving the conditions in slum areas, for which credit may be extended directly to the slum-dwellers on the guarantee of the Central Government, or indirectly to them through the State Governments; 
    10. Loans given for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies; 
    11. Lending to builders for construction of residential dwelling units.
       
  3. All other loans, including those given for furnishing dwelling units, loans against mortgage of property for any purpose other than buying or construction of a new dwelling or renovation of an existing dwelling unit(s), shall be treated as non-housing loans and hence, will not fall under the definition of housing finance.
     
  4. Integrated housing project comprising some commercial spaces (e.g., shopping complex, school, etc.) can be treated as residential housing, provided that the commercial area in the residential housing project does not exceed 10% of the total Floor Space Index (FSI) of the project.

    Transition phase​
     
  5. In relation to existing HFCs which do not currently fulfill the criteria, but wish to continue as HFCs, shall be provided with a phased timeline for transition as under:
Timeline Minimum percentage of total assets towards housing finance Minimum percentage of total assets towards housing finance for individuals
31 March 2022 50% 40%
31 March 2023 55% 45%
31 March 2024 60% 50%

Such HFCs shall be required to submit a Board-approved plan within three months to the Reserve Bank, including a roadmap to fulfill the above-mentioned criteria and timeline for transition. HFCs unable to fulfill the above criteria as per the timeline shall be treated as NBFC – Investment and Credit Companies (NBFC-ICC), and they will be required to approach the Reserve Bank for the conversion of their Certificate of Registration from HFC to NBFC-ICC.
 
 Net owned fund (NOF) requirement
 
  1. The minimum NOF requirement has been increased to INR 200 million (from the earlier limit of INR 100 million).

    Transition phase
     
  2. For existing HFCs having NOF below INR 200 million, the RBI has provided a timeline to achieve the revised NOF threshold by 31 March 2023 in a phased manner (NOF of INR 150 million by 31 March 2022 and INR 200 million by 31 March 2023). Existing HFCs are required to submit a statutory auditor’s certificate to the RBI within one month, evidencing compliance with the new NOF requirements.

    HFCs unable to fulfill the above criteria as per the timeline shall be treated as NBFC – Investment and Credit Companies (NBFC-ICC), and they will be required to approach the Reserve Bank for the conversion of their Certificate of Registration from HFC to NBFC-ICC.
 Exposure of HFCs to group companies engaged in real estate business

The regulations allow HFCs to issue loans to group companies via direct or indirect routes (lending to individual retail customers of group companies). However, such lending is not permitted to exceed, directly or indirectly, 15% of owned funds for exposure to a single group entity and 25% of owned funds for the entire group of companies.
 
 Applicability of the following directions relation to NBFCs made applicable to HFCs
 
  1. Applicability of directions issued by the RBI:
    The following master directions (as amended) shall apply mutatis mutandis to all HFCs:
    1. Master Direction – Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016.
    2. Master Direction – Information Technology Framework for the NBFC Sector dated 8 June 2017.
       
  2. The following instructions relating to NBFCs shall apply mutatis mutandis to all HFCs (detailed further in the Annexure to the notification):
    1. Definition of public deposits. Further, any amount received from NHB or any public housing agency shall be exempted from the definition of public deposit;
    2. Implementation of Indian Accounting Standards;
    3. Loans against security of shares and gold jewellery;
    4. Levy of foreclosure charges;
    5. Guidelines on Securitization Transactions and reset of Credit Enhancement;
    6. Managing Risks and Code of Conduct in Outsourcing of Financial Services;
    7. Guidelines on Liquidity Risk Management Framework;
    8. Guidelines on Liquidity Coverage Ratio (LCR). The guidelines for LCR shall be effective from 1 December 2021.

1. Notification no. RBI/2020-21/60 - Review of regulatory framework for Housing Finance Companies (HFCs)
Our Comments
 
A definite clarity on the regulatory framework governing HFCs was long-awaited post the change in the regulatory authority from NHB to RBI. The revised regulatory framework is a step towards bringing uniformity in the regulatory framework for HFCs and NBFCs, which is expected to improve the risk and liquidity management, governance and asset quality at HFCs.
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