The central banking regulator, the Reserve Bank of India (“RBI“), has issued a circular (“RBI HFC Circular“) introducing certain changes in the regulatory framework for housing finance companies (“HFCs“).

Some of the changes relevant to note have been set out below.

1. Definition of HFC – The RBI has provided a definition for HFCs as a company incorporated under the Companies Act, 2013 that fulfills the following conditions:

(a) It is an NBFC (i.e. its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets should be more than 50 per cent of the gross income) whose financial assets, in the business of providing finance for housing, constitute at least 60% of its total assets (netted off by intangible assets).

(b) Out of the total assets (netted off by intangible assets), not less than 50% should be by way of housing financing for individuals as specified in the RBI HFC Circular.

The definition of ‘housing finance’ which means financing, for the purchase  / construction / renovation / repairs of residential dwelling units, has been set out in further detail under the RBI HFC Circular.

2. Minimum NOF including for existing HFCs – INR 20 Crore has been specified as the minimum net owned funds (“NOF“) required for a company to commence and/or carry on the business of housing finance as its principal business. Existing HFCs which hold a certificate of registration and have an NOF of less than INR 20 Crore may continue to carry on the business of housing finance if they achieve an NOF of INR 15 Crore by March 31, 2022 and INR 20 Crore by March 31 2023.

3. NBFC-ICCs – Companies that seek to treated as NBFC – Investment and Credit Companies (“NBFC-ICCs“), will be required to approach RBI for conversion of their certificate of registration from HFC to NBFC-ICC. The manner in which the application is required to be submitted has been set out in the RBI HFC Circular.

4. Certain specified guidelines and instructions applicable to NBFCs have also been made applicable to HFCs. This list consists of the RBI Master Direction – Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016 and RBI Master Direction – Information Technology Framework for the NBFC sector dated June 8, 2017. In addition, instructions issued by the RBI with respect to the following have been made applicable to all HFCs:

(a) Definition of public deposits;
(b) Implementation of Indian Accounting Standards;
(c) Relevant Master Directions in respect of Loans against security of shares;
(d) Relevant Master Directions in respect of Loans against security of single product – gold jewellery;
(e) Relevant Master Directions in respect of Levy of foreclosure charges;
(f) Guidelines on securitization transactions and reset of credit enhancement;
(g) Managing risks and code of conduct in outsourcing of financial services;
(h) Guidelines on liquidity risk management framework; and
(i) Guidelines on liquidity coverage ratio

Please refer to the RBI HFC Circular for further details, thresholds and applicable guidelines with respect to each of the points covered above.

5. Exposure to Group Companies in Real Estate Business– The RBI HFC Circular further provides that in case of companies in a group engaged in the business of real estate, HFCs may undertake exposure either to the group company engaged in real estate business or lend to retail individual home buyers in the projects of such group companies. Such exposure directly or indirectly, cannot be more than 15% of owned fund for a single entity in the group and 25% of owned fund for all such group entities. HFCs are required to follow arm’s length principles in letter and spirit.

The RBI intends on bringing harmonization between the regulations of HFCs and NBFCs in a phased manner to avoid any potential disruptions and has also decided to additionally exempt HFCs from Section 45 IB (Maintenance of percentage of assets) and Section 45 IC (Reserve fund) of the RBI Act, 1934 which will be notified by the RBI under separate notifications. The corresponding provisions of Section 29B (Maintenance of percentage of assets) and 29C (Reserve fund) of the National Housing Bank Act, 1974 will, however, continue to remain applicable.

A master direction addressed to HFCs is expected soon.

We do hope the above is helpful. In case you have any specific queries or require any clarifications, please do feel free to reach out to the authors, Anand Shah, Senior Partner (anand.shah@azbpartners.com), Hufriz Wadia, Partner (hufriz.wadia@azbpartners.com), Kemi Gupta, Associate (kemi.gupta@azbpartners.com) and Neeraj Nainani, Associate (neeraj.nainani@azbpartners.com).   

Authors:

Anand Shah, Senior Partner
Hufriz Wadia, Partner
Kemi Gupta, Associate
Neeraj Nainani, Associate