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The Finance (No. 2) Act, 2019 (23 of 2019) amended the National Housing Bank Act, 1987 (NHB Act) conferring powers for regulation of Housing Finance Companies (HFCs)
The Finance (No. 2) Act, 2019 (23 of 2019) amended the National
Housing Bank Act, 1987 (NHB Act) conferring powers for regulation
of Housing Finance Companies (HFCs) with Reserve Bank of India
(RBI), which came into effect from 9 August 2019 vide notification
of the Government of India. On 13 August 2019, RBI issued a Press
Release stating that pursuant to the amendments to the NHB Act
conferring powers to the RBI, HFCs will henceforth be treated as
one of the categories of Non-Banking Financial Companies (NBFCs)
for regulatory purposes. Reserve Bank will carry out a review of
the extant regulatory framework applicable to the HFCs and finalize
revised regulations in due course. Further, on 12 November 2019,
the RBI vide a notification, withdrew the exemption given to the
HFCs from the applicability of Chapter IIIB of the Reserve Bank of
India Act, 1934 (RBI Act) (except section 45IA of the RBI
Act).
Subsequently, on 17 June 2020, the RBI released the draft revised
regulatory framework for HFCs, inviting public comments by 15 July
2020. The draft revised framework has now been finalized and
notified vide Notification1 dated 22 October 2020.
The below paragraphs summarize the key changes proposed for the
HFCs:
Definitions of 'Housing Finance Company'
and 'Housing Finance'
HFC has been defined as a 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 out of the total assets (netted off by
intangible assets), not less than 50% should be by way of housing
financing for individuals.
'Housing Finance' has been
defined as the financing for purchase or construction or
reconstruction or renovation or repairs of residential dwelling
units (which includes loans given for specified purposes) which
includes:
Loans to individuals or group of
individuals including co-operative societies for
construction/purchase of new dwelling units;
Loans to individuals or group of
individuals for the purchase of old dwelling units;
Loans to individuals or group of
individuals for purchasing old/new dwelling units by mortgaging
existing dwelling units;
Loans to individuals for the 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;
Loans to individuals or group of
individuals for renovation/ reconstruction of existing dwelling
units;
Lending to public agencies including
state housing boards for construction of residential dwelling
units;
Loans to corporates/ Government
agencies for employee housing;
Loans for construction of
educational, health, social, cultural, or other
institutions/centers, which are part of housing projects and which
are necessary for the development of settlements or townships (see
note below);
Loans for construction meant for
improving the conditions in slum areas, for which credit may be
extended directly to the slum-dwellers on the guarantee of the
Central Government, or indirectly to them through the State
Governments;
Loans given for slum improvement
schemes to be implemented by Slum Clearance Boards and other public
agencies;
Lending to builders for construction
of residential dwelling units.
All other loans, including those
given for furnishing dwelling units, loans against mortgage of
property for any purpose other than buying or construction of a new
dwelling or renovation of an existing dwelling unit(s), shall be
treated as non-housing loans and hence, will not fall under the
definition of housing finance.
Integrated housing project comprising
some commercial spaces (e.g., shopping complex, school, etc.) can
be treated as residential housing, provided that the commercial
area in the residential housing project does not exceed 10% of the
total Floor Space Index (FSI) of the project.
Transition phase
In relation to existing HFCs which do
not currently fulfill the criteria, but wish to continue as HFCs,
shall be provided with a phased timeline for transition as
under:
Timeline
Minimum percentage of total assets towards housing
finance
Minimum percentage of total assets towards housing finance
for individuals
31 March 2022
50%
40%
31 March 2023
55%
45%
31 March 2024
60%
50%
Such HFCs shall be required to submit a Board-approved plan within
three months to the Reserve Bank, including a roadmap to fulfill
the above-mentioned criteria and timeline for transition. HFCs
unable to fulfill the above criteria as per the timeline shall be
treated as NBFC – Investment and Credit Companies (NBFC-ICC),
and they will be required to approach the Reserve Bank for the
conversion of their Certificate of Registration from HFC to
NBFC-ICC.
Net owned fund (NOF) requirement
The minimum NOF requirement has been
increased to INR 200 million (from the earlier limit of INR 100
million).
Transition phase
For existing HFCs having NOF below INR 200 million,
the RBI has provided a timeline to achieve the revised NOF
threshold by 31 March 2023 in a phased manner (NOF of INR 150
million by 31 March 2022 and INR 200 million by 31 March 2023).
Existing HFCs are required to submit a statutory auditor's
certificate to the RBI within one month, evidencing compliance with
the new NOF requirements.
HFCs unable to fulfill the above criteria as per the timeline
shall be treated as NBFC – Investment and Credit Companies
(NBFC-ICC), and they will be required to approach the Reserve Bank
for the conversion of their Certificate of Registration from HFC to
NBFC-ICC.
Exposure of HFCs to group companies engaged in
real estate business
The regulations allow HFCs to issue loans to group companies via
direct or indirect routes (lending to individual retail customers
of group companies). However, such lending is not permitted to
exceed, directly or indirectly, 15% of owned funds for exposure to
a single group entity and 25% of owned funds for the entire group
of companies.
Applicability of the following directions
relation to NBFCs made applicable to HFCs
Applicability of directions issued by
the RBI:
The following master directions (as amended) shall apply mutatis
mutandis to all HFCs:
Master Direction – Monitoring
of Frauds in NBFCs (Reserve Bank) Directions, 2016.
Master Direction – Information
Technology Framework for the NBFC Sector dated 8 June 2017.
The following instructions relating
to NBFCs shall apply mutatis mutandis to all HFCs (detailed further
in the Annexure to the notification):
Definition of public deposits.
Further, any amount received from NHB or any public housing agency
shall be exempted from the definition of public deposit;
Implementation of Indian Accounting
Standards;
Loans against security of shares and
gold jewellery;
Levy of foreclosure charges;
Guidelines on Securitization
Transactions and reset of Credit Enhancement;
Managing Risks and Code of Conduct in
Outsourcing of Financial Services;
Guidelines on Liquidity Risk
Management Framework;
Guidelines on Liquidity Coverage
Ratio (LCR). The guidelines for LCR shall be effective from 1
December 2021.
A definite clarity on the regulatory
framework governing HFCs was long-awaited post the change in the
regulatory authority from NHB to RBI. The revised regulatory
framework is a step towards bringing uniformity in the regulatory
framework for HFCs and NBFCs, which is expected to improve the risk
and liquidity management, governance and asset quality at
HFCs.
Originally published by SKP, November 2020
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guide to the subject matter. Specialist advice should be sought
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