RBI has put in its web site newly proposed guidelines inviting observations from all stakeholders to be received latest by July 15, 2020 by email to feedbackhfc@rbi.org.in related to Housing Finance Companies popularly known as “HFCs”. Let us grasp the extant guidelines which do alter our ways to do business with HFCs.
Now, the detailed guidelines.
Preamble
National Housing Bank Act, 1987, powers for regulation of HFCs have been amended to rest with RBI w.e.f. August 09, 2019. As a corollary, HFCs will therefore be treated as Non-Banking Financial Company (NBFC).
“The Reserve Bank has undertaken the said review and has identified a few changes which are proposed to be prescribed for HFCs. These are as under:
a. Defining principal business and qualifying assets for HFCs;
b. Defining the phrase ‘providing finance for housing’ or ‘housing finance’;
c. Classifying HFCs as systemically important (asset size of ₹500 crore & above) and non-systemically important (asset size less than ₹500 crore); and
d. Reserve Bank’s directions on Liquidity Risk framework &, LCR, securitization, etc., for NBFCs, to be made applicable to HFCs.”
Applicable law for the regulation of HFCs
“In order to avoid dual regulation, HFCs were granted exemption from the provisions of Chapter IIIB of the RBI Act, 1934 vide notification dated June 18, 1997 by exercising powers under Section 45NC of RBI Act, 1934. With the transfer of regulation of HFCs to RBI it was decided to withdraw these exemptions and make the provisions of Chapter IIIB except Sec 45-IA of RBI Act applicable to all HFCs.”
A transition to the ambit of RBI making several demands, both regulatory as well as financial in tune with those of NBFCs who have faced multitude of regulations to meet current day business requirements is a professional move, indeed. A detailed analysis of the preamble throws interesting revelations. A change for better, I would assess.
Defining the term ‘providing finance for housing’ or ‘housing finance’
Recent HFCs have shown a tendency to violate sacred or ethical value for housing projects which propelled the usual humble seeker of a residential house, a life time goal for any poor or middle class Indian to book for a house, face enormous miseries. Frauds by builders and failure to exercise required caution and financial caution by Housing finance companies have forced the authorities to define housing finance in an explicit manner.
The following information from original RBI circular is important for any housing loan seeker to quote if necessary, at legal circles or ensure proper wording in housing loan documents to safeguard his/her legal rights. The writer, an authorized representative in a NCLT infrastructure company dealing with various types of housing including commercial units who has seen many heartbroken investors feels happy to see new legal orientation for Housing Finance Companies. Let us hear from horse’s mouth, the real definition which is legally explained by RBI. Really, what is housing finance or providing finance for housing? Is there more to law than what one commonly infers by intuition.
“Accordingly, ‘Housing Finance” or “providing finance for housing” means:
Financing, for purchase/ construction/ reconstruction/ renovation/ repairs of residential dwelling units, which includes:
a. Loans to individuals or group of individuals including co-operative societies for construction/ purchase of new dwelling units.
b. Loans to individuals for purchase of old dwelling units.
c. Loans to individuals for purchasing old/ new dwelling units by mortgaging existing dwelling units.
d. Loans to individuals for 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.
e. Loans to individuals for renovation/ reconstruction of existing dwelling units.
f. Lending to public agencies including state housing boards for construction of residential dwelling units.
g. Loans to corporate/ Government agencies (through loans for employee housing).
h. Loans for construction of educational, health, social, cultural or other institutions/centers, which are part of housing project in the same complex and which are necessary for the development of settlements or townships;
i. Loans for construction of houses and related infrastructure within the same area, meant for improving the conditions in slum areas for which credit may be extended directly to the slum-dwellers on the guarantee of the Government, or indirectly to them through the State Governments;
j. Loans given for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies;
k. Lending to builders for construction of residential dwelling units.”
It is highly essential that any investor of a housing project for purchase of a house do read the above quote from RBI guidelines for proper usage in his documents. Or, a proper knowledge of the legal terms does help any one in future if at all a legal course is required.
Classifying HFCs into systemically important and non-systemically important entities for regulatory purposes
Interestingly, a new definition and distinction is expected as “non-deposit taking HFCs (HFC-ND) with asset size of ₹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 ₹500 crore will be treated as non-systemically important HFCs (HFC-non-SI). While the regulations for HFC-NDSI & HFC-Ds will be as existing under NHB regulations or harmonized with NBFC regulations, the regulations for HFC-non-SI (i.e., HFCs with asset size below ₹500 crore) will be brought on par with relevant regulations for NBFC-ND-non-SI (Master Direction for non-systemically important NBFCs dated September 01, 2016 and updated up to February 17, 2020)”.
These distinctions will make the HFCs with higher asset size as visible in the eyes of the housing loan seeker and look with more clarity and eagerness to do the business.
RBI intends to increase NOF (Net Owned Fund) for HFCs from Rs 10 to Rs 20 crores and the gliding is to be increased systematically over a period of time for up gradation of their capital structure. A period of one year to reach Rs 15 crores and 2 years to reach Rs 20 Crores has been proposed. More important changes envisaged are given as under for easy reference.
- Non-deposit taking NBFCs with asset size of ₹100 crore & above, systemically important Core Investment Companies and all deposit taking NBFCs (except Type 1 NBFC-NDs, Non-Operating Financial Holding Companies and Standalone Primary Dealers) were advised to adhere to the guidelines as mentioned in NBFC (PD) CC. No.102/03.10.001/2019-20 dated November 04, 2019.
- It is proposed to extend these guidelines to all non-deposit taking HFCs with asset size of ₹100 crore & above and all deposit taking HFCs. Action taken as per above directions will initially fall under the supervision of RBI.
- Monitoring of frauds has been the function of NHB so far with reference to HFCs but this will get a change over and RBI would ensure the supervision in terms of Master Direction – Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016 issued on September 29, 2016.
- Unfortunately, HFCs have surrounded themselves with massive frauds emanating from various stake holders. Thousands of Crores of investments of investors., bankers, land owners, bond holders, suppliers or even government agencies have been diverted by the owners of HFCs resulting in huge loss for the stakeholders.
- I do believe RBI with its vast experience in dealing with frauds at banks would guide HFCs and help them better. Yes, frauds would never end but can be effectively controlled.
- With imminent decision taken to withdraw the instructions covering IT framework related to IT Governance, IT Policy, Information & Cyber Security, IT Operations, IS Audit, Business Continuity Planning and IT Services Outsourcing originally issued by NHB and replace the ones issued for NBFCs, a new dimension in the technological up grading of HFCs has emerged. This will augur well to face the future with the advanced technological hardware/software.
The following quote from the proposed guidelines of RBI
“Foreclosure charges
As a measure of customer protection and also in order to bring in uniformity with regard to repayment of various loans by borrowers of banks and NBFCs, no foreclosure charges/pre-payment penalties shall be levied on any floating rate term loan sanctioned for purposes other than business to individual borrowers with or without co-obligants. Since similar regulations are currently not prescribed for HFCs, it is proposed to extend these instructions to HFCs”.
It is evident from RBI proposed guidelines, that some of the progressive instructions which were earlier reserved for NBFCs would also cover HFCs enabling them to compete with confidence.
Implementation of Indian Accounting Standards
It is in our knowledge that Ind AS implementation has already been implemented in NBFCs facilitating their emergence as powerful financial institutions in tune with IFRS instructions. HFCs would similarly face the implementation of same accounting standards, particularly in respect of following heads.
- Capital requirements (CRAR and risk weights)
- Income Recognition, Asset Classification and Provisioning (IRACP) norms
- Norms on concentration of credit / investment
- Limits on exposure to Commercial Real Estate (CRE) & Capital Market (CME)
- Regulations on acceptance of Public Deposits
It is expected to have a time span of 2/3 years to get the implementation of Ind AS standards and to continue with old GAAP standards, till such time.
Conclusion
The preamble given by RBI as reproduced above, was an attractive caption particularly for those who are dealing with HFCs which have raised the expectations of housing loan applicants or those who looked at HFCs approved schemes as strong foundations on which they can invest and have a nice home. Fortunately, HFCs measured up to expected level by sanctioning housing loans at a lightening speed but somewhat approved all would be building plans by private builders as as if they stand guarantee for the success of housing projects. Many of housing companies from commercial banks failed to expand their excellent business models by refusing to modernize.
I am reproducing the RBI web site to remind all future home buyers that complete knowledge about the HFCs that they intend to deal with is a necessity in view of the longevity of transaction-sometimes, even 20 years of repayment.
Website address of RBI with its guidelines
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49961
I looked at the word “draft” in above communication which contained the above guidelines
Kindly go through the full coverage of RBI guidelines to be implemented and suggest any changes that you might have come across in your life, or heard from one of your friends who suffered on account of housing companies/builders either as investor or as a borrower. Let us strengthen the guidelines of RBI with our comments.
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