In August, 2019, the government has exercised the Finance (No.2) Act, 2019 (23 of 2019) for amending the National Housing Bank Act, 1987 resulting in transfer of regulation of housing finance companies (HFCs) to Reserve Bank of India (RBI) from the National Housing Bank (NHB). After this, Part VII of Chapter VI of the Finance (No.2) Act, 2019 (23 of 2019 came into effect, stating an issue of revised regulations.
- In this regard, on June 17, 2020, RBI being a new regulator has proposed changes to be prescribed for HFCs with an aim to increase their efficiency and address concerns of liquidity and double financing.
Following are the key proposals:
Minimum net owned funds (NOF) requirement proposed to Rs 20 cr
In exercise of powers conferred under Section 29A (1) (b) of NHB Act, 1987, RBI proposes to increase the minimum NOF for HFCs from the current requirement of Rs10 crore to Rs 20 crore in order to strengthen their capital base.
- Existing HFCs will get one year to reach the level of Rs 15 crore and two years to increase it to Rs 20 crore.
Increase in CRAR
For HFCs, the minimum capital risk-weighted assets ratio (CRAR) is currently at 12%, which will be increased to 14% by 31 March 2021 and 15% by 31 March 2022.
Classifying HFCs into systemically important and non-systemically important entities
Presently HFC regulations are common for all HFCs irrespective of their asset size and ownership. It is proposed to issue HFC regulations by classifying them as systemically important and non-systemically important, so as to introduce a graded approach. Therefore it is proposed that,
- Non-deposit (ND) taking HFCs (HFC-ND) with asset size of Rs 500 crore & above; and all deposit taking HFCs (HFC-D), irrespective of asset size, will be treated as systemically important HFCs. HFCs with asset size below Rs 500 crore will be treated as non-systemically important HFCs (HFC-non-SI).
Defining of term ‘housing finance’
Under the NHB regulations, there was no formal definition of housing finance. In the draft framework released on its website, RBI said housing finance will now mean “financing, for purchase/construction/reconstruction/ renovation/ repairs of residential dwelling unit” and some other activities, including giving loans to corporate and government agencies for employee housing projects.
Definition of qualifying assets for housing finance companies (HFCs)
In another proposal, housing loans must account for at least 50% of HFCs’ assets of which at least 75% should be towards individual housing loans. HFCs which do not fulfil this criterion will be treated as NBFC – Investment and Credit Companies (NBFC-ICCs) and will be required to approach the RBI for conversion of their Certificate of Registration from HFC to NBFC-ICC.
- In order to remain working as HFC, they would have to follow a roadmap to make 75% of their assets individual housing loans. The target has been set at 60% by March 31, 2022, 70% by March 31, 2023, and 75% by March 31, 2024.
HFCs to be treated as NBFC in case of more financial assets
A housing finance company is considered a non-banking financial company (NBFC) under the RBI’s regulations. A company is treated as an NBFC if its financial assets are more than 50% of its total assets and income from financial assets is more than 50% of the gross income.
Addressing Double Financing
The regulator also sought to address concerns on “double financing” due to lending by an HFC to construction companies and also to individuals purchasing flats from the same companies. As per proposal, HFC can now either lend to a real estate company or to homebuyers in the projects of group entities, but not to both.
- Also, HFCs cannot take exposure of more than 15% of owned funds to one company in a group and more than 25% across all companies of the same group.
-To bring all HFCs under the ambit of guidelines on securitisation transactions as applicable to non-banking finance companies (NBFCs).
-Loans for furnishing a house, loans against mortgage of property for any purpose other than for buying, construction or renovation of a house will be treated as non-housing loans.
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About Reserve Bank of India (RBI):
Headquarters– Mumbai, Maharashtra
Formation– 1 April 1935
Governor– Shaktikanta Das
Deputy Governors– 4 (Bibhu Prasad Kanungo, Mahesh Kumar Jain, Michael Debabrata Patra, one is yet to be appointed).