Review of Regulatory Framework for Housing Finance Companies

The RBI, on October 22, 2020 (‘HFC Circular’), introduced changes to the regulatory framework for Housing Finance Companies (‘HFCs’). The key changes are set out below:

i.      HFC Definition – An HFC is now a company incorporated under the Companies Act which fulfils the following conditions:

(a)   It is a non-banking financial company (‘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

(b)   Out of the total assets of the company (netted off by intangible assets), not less than 50% should be by way of housing finance, e. financing, for the purchase, construction, renovation, repairs of residential dwelling units for individuals;

ii.    Minimum Net Owned (‘NOF’) Requirement – The NOF for a company to commence and/or carry on the business of housing finance as its principal business is now Rs 200,000,000 (approx. US$ 2.74 million). Existing HFCs have been given a staggered timeline of upto March 31, 2022 to comply with this requirement;

iii.   NBFC-ICCs – HFCs which seek to be treated as NBFC – Investment and Credit Companies (‘NBFC-ICCs’), must approach the RBI for conversion of their certificate of registration from HFC to NBFC-ICC, in a manner as set out in the HFC Circular;

iv.    Applicability of NBFC Guidelines – Certain guidelines applicable to NBFCs have been extended 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.

v.     Exposure to Group Companies in Real Estate Business – In case of companies in a group engaged in real estate business, HFCs may have 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 in relation to such transactions.

The RBI intends to harmonize the regulations for HFCs and NBFCs in a phased manner to avoid any potential disruptions. Further, HFCs are proposed to be exempted from certain requirements under the RBI Act, 1934 with respect to maintenance of percentage of assets and reserve fund, which will be effected through separate notifications. A master direction addressed to HFCs in this regard is expected soon.