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RBI releases proposed changes in regulations applicable to housing finance companies for public
comments
June 25, 2020
In brief
On 17 June 2020, after a review of the extant regulatory framework, the Reserve Bank of India (RBI) issued a press release1 placing a draft of the proposed major changes envisaged in the regulatory framework for housing finance companies (HFCs). The proposed changes involve either making the relevant paras in the non-banking finance company (NBFC) Master Directions applicable to HFCs (where the extant HFC and NBFC regulations are in tandem) or retaining the extant regulations or changing HFC regulations, wherever possible, in the least disruptive manner. The RBI seeks public comments on the draft framework on or before 15 July 2020.
In detail
Background
The Finance (No.2) Act, 2019 shifted the powers for
regulation of HFCs from the National Housing Bank (NHB) to the RBI. The RBI had earlier decided that HFCs will be regulated as a category of NBFC, and accordingly, it has withdrawn the exemption earlier given to HFCs, from becoming NBFCs. The RBI also decided to review the extant HFC regulatory framework and issue revised regulations.
Proposal
The extant regulations have been reviewed to regulate HFCs as NBFCs and the revisions were proposed on the basis that –
1 RBI releases proposed changes in regulations applicable to Housing Finance Companies (HFCs) for public comment dated 17 June 2020
(a) To the extent that the extant regulations are in tandem with those applicable to NBFCs, the relevant paras in the NBFC Master Directions should mutatis mutandis apply to HFCs.
(b) In areas where the extant HFC regulations differ from those applicable to NBFCs, it is proposed to retain existing provisions or make changes, wherever possible, in the least disruptive manner.
The major changes, envisaged under clause (b) above, in the regulatory framework for HFCs are as follows:
Registration
• New HFCs shall seek registration with the RBI under section 29A of the NHB Act, 1987.
• Existing HFCs holding registration issued by the NHB need not approach the RBI for fresh registration.
Definition of the term
“providing finance for
housing” or “housing finance”
• The term “housing finance”
was not formally defined under the extant regulation.
Therefore, it is proposed to add a formal definition as follows:
“Housing finance” or
“providing finance for housing” means:
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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 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 corporates/
government agencies (through loans for employee housing).
h. Loans for construction of educational, health, social, cultural or other institutions/ centres, which are part of the housing project in the same complex, and which
2 As defined in the RBI’s Press Release no. 1998-99/1269 dated 8 April 1999
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.
• All other loans, including those given for furnishing dwelling units, loans given against mortgage of property for any purpose other than the above, will be treated as non- housing loans.
Defining “principal business” and
“qualifying assets” for HFCs
• Section 29A of the NHB Act deals with company carrying on “principal business,” which is not defined.
• The RBI proposes to extend the term principal business as defined for NBFCs2 to HFCs. A company is treated as a NBFC if its financial assets are more than 50% of its total assets (netted off by intangible assets) and the income from financial assets is more than 50% of the gross income. Both these tests are required to be satisfied, as the determinant
factor for the principal business of a NBFC.
• The RBI proposes to introduce the concept of “qualifying assets” for HFCs, which are assets referred to in the above definition of “housing finance”
or “providing finance for housing” subject to the following:
(a) Not less than 50% of net assets are in the nature of
“qualifying assets” and at least 75% thereof should be towards individual housing loans, as stated in clauses (a) to (e) of the above para.
(b) “Net assets” shall mean total assets other than cash and bank balances and money market instruments.
• HFCs that do not fulfil the above criteria will be treated as NBFC – Investment and Credit Companies (NBFC- ICCs) and will be required to approach the RBI, together with an auditor’s certificate on Principal Business Criteria (PBC) and other documents, to convert their registration from a HFC to NBFC-ICC.
• HFCs that do not currently fulfil the qualifying assets criteria, but wish to continue as HFCs in future, need to fulfil the conditions in a phased timeline, as follows:
- At least 50% of net assets as qualifying assets, i.e., towards housing finance by 31 March 2022.
- At least 75% of qualifying assets towards housing finance for individuals – 60% by 31 March 2022;
70% by 31 March 2023; and 75% by 31 March 2024.
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HFC classification
• The RBI proposes to classify HFCs as –
a. Non-deposit taking HFCs (HFC-ND) with asset size of INR 5bn and above and all deposit-taking HFCs (HFC-D),
irrespective of asset size, will be treated as
systemically important (SI) HFCs. The
regulations for HFC-ND- SI and HFC-D will be same as the existing NHB regulations or
harmonised with the NBFC regulations.
b. HFCs with asset size below INR 5bn will be treated as non-
systemically important HFCs (HFC-non-SI). The regulations for HFC-non- SI will be brought on par with relevant regulations for NBFC-ND-non-SI.3 Minimum net owned fund of INR 200m
• The RBI proposes to increase the minimum net owned fund for HFCs to INR 200m from the current requirement of INR 100m to strengthen the capital base.
• For existing HFCs, the glide path would be to reach INR 150m within one year and INR 200m within two years.
Harmonising definitions of Capital (Tier I and Tier II) with that of NBFCs
• The RBI proposes to align the definitions of Tier I and Tier II capital of HFCs with that of NBFCs,4 the changes being:
3 As provided in Master Direction for non- systemically important NBFCs dated 1 September 2016 and updated up to 17 February 2020
4 As per Para 3 (xxxii) and 3 (xxxiii) of MD – NBFC – Systemically important Non- Deposit taking Company and Deposit
i. Inclusion of Perpetual Debt Instrument (PDIs) as a component of Tier I and Tier II capital on the lines of NBFCs.
ii. Only HFC-ND-SIs can treat PDIs as part of Tier I/ II capital.
iii. PDIs or any other debt capital instrument in the nature of PDIs, already issued by either HFC-Ds or HFC-non-SIs will be reckoned as Tier I or Tier II capital, as the case may be, for a period not exceeding three years.
iv. Investments in shares of other HFCs and in other NBFCs (whether forming part of group or not), shall be reduced from the Tier I capital to the extent it exceeds, in aggregate, along with other exposures to group companies, 10%
of the owned fund of the HFC.
Public deposits
The RBI proposes to align the definition of public deposit as given under the RBI Master Direction for acceptance of public deposit by NBFC with an addition that any amount received by HFCs from NHB or any public housing agency is also exempt from the definition of public deposit.
Liquidity risk framework and liquidity coverage ratio
• The RBI proposes to extend the Liquidity Risk
Management Framework for NBFCs and Core Investment Companies5 to all non-deposit taking HFCs with asset size of
taking Company (Reserve Bank) Directions, 2016 (updated as on 17 February 2020)
5 As mentioned in DOR.NBFC (PD) CC. No.102/03.10.001/2019-20 dated 4 November 2019.
INR 1bn and above and all deposit-taking HFCs.
• As a matter of prudence, all other HFCs are encouraged to adopt these guidelines on liquidity risk management voluntarily.
Group entities of HFCs
• HFCs can either lend to the group company in the real estate business or lend to retail individual homebuyers in the projects of such group entities, but not do both.
• Direct or indirect exposure of the HFC in its group entities (lending and investment) cannot be more than 15% of the owned fund for a single entity in the group and 25% of the owned fund for all such group entities.
• The HFC would follow arm’s length principles in letter and spirit for extending loans to individuals who choose to buy housing units from entities in the group.
Others
• The RBI proposes that the – a. Fraud monitoring
directions applicable to NBFCs,6 should be made applicable to HFCs in place of the present guidelines issued by the NHB.
b. The Information Technology (IT) Framework for NBFCs7 should be made
applicable to HFCs based on applicable
classification into SI and Non-SI, and
consequently, the
6 Master Direction - Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016 issued on 29 September 2016
7 Issued vide Master Directions DNBS.PPD.No.04/66.15.001/2016-17 dated 8 June 2017
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erstwhile guidelines issued by the NHB should be withdrawn.
c. The guidelines on securitisation
transaction, as applicable to NBFCs,8 instructions applicable to NBFCs9 to lend against the collateral of listed shares and the outsourcing guidelines applicable to NBFC-ND- SIs10 should be made applicable to all HFCs.
d. 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.
e. The instructions issued to NBFCs on
implementation of Indian Accounting Standards11
8 As contained contained in Annex XXII to MD – NBFC – Systemically important Non-Deposit taking Company and Deposit taking Company (Reserve Bank)
Directions, 2016 (updated as on 17 February 2020)
should be made applicable to all HFCs.
Prudential floor for Expected Credit Loss will be based on the extant instruction on the provisioning applicable to HFCs.
• Besides the above, major differences exist between extant regulations of the HFCs vis-à-vis that of NBFCs, which will be harmonised in a phased manner over a period of two to three years. Until such time, HFCs will continue to follow the extant norms. Some such differences are as follows –
a. Capital requirements (CRAR and risk weights) for HFCs, which is currently 12%, will be progressively increased to 14% by 31 March 2021 and to 15% by 31 March 2022. Similar differences
9 Contained in para 22 of the MD – NBFC – Systemically important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (updated as on 17 February 2020)
10 Annex XXV to the MD – NBFC – Systemically important Non-Deposit taking
exist in asset weightages.
b. Income recognition, asset classification and
provisioning norms.
c. Norms on concentration of credit/ investment.
d. Limits on exposure to Commercial Real Estate and Capital Market and NBFCs.
e. In case of regulations on acceptance of public deposits, there are differences in relation to period of public deposit, ceiling on quantum of deposit, interest on premature repayment of deposits, maintenance of liquid assets, etc.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Company and Deposit taking Company (Reserve Bank) Directions, 2016 (updated as on 17 February 2020)
11 Circular No. DOR (NBFC)
CC.PD.No.109/22.10.106 /2019-20 on 13 March 2020
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