Explained | RBI rules on Housing Finance Companies: 10 key questions answered

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The Reserve Bank of India (RBI) on February 18 issued a master circular consolidating guidelines issued in the past for Housing Finance Companies (HFCs). These norms pertain to various aspects of such companies including liquidity coverage ratio, risk management and qualifying asset norms.

Here’s a quick explainer on the rules and how they impact you.

Are these guidelines new?

No. The RBI had issued a revised regulatory framework for HFCs on October 22 based on feedback from stakeholders. These guidelines now come into effect with the issues of a master circular. This is part of the process of transferring the regulations of these companies from the National Housing Bank to the central bank.

What is an HFC?

The RBI defines an HFC as an NBFC whose financial assets in the business of housing finance are at least 60 percent of its total assets. Out of the total assets, not less than 50 percent should be for housing finance for individuals. HFCs, which currently do not fulfil this criterion, need to meet the 60 percent cut-off by March 2024. Of this, at least 50 percent should be towards housing finance for individuals.

HFCs that do not meet the prescribed criteria need to submit a board-approved plan to the RBI within three months including a roadmap to fulfil this criterion and the timeline for transition

What happens if the criteria are not met?

HFCs unable to fulfil the prescribed conditions in the stipulated period shall be treated as NBFC – Investment and Credit Companies (NBFC-ICC). They will have to approach the central bank for the conversion of their Certificate of Registration from HFC to NBFC-ICC, the RBI said.

How much capital is required for an HFC?

An HFC needs a minimum of Rs 20 crore, the minimum net owned funds required for a company to commence housing finance as its principal business or carry on the business of housing finance as its principal business.

If and HFC fails to comply with this norm within a specified period, its registration will be cancelled.

Can HFCs levy foreclosure charges on customers?

No. HFCs cannot impose foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned for purposes other than business to individual borrowers, the RBI has said.

What about the LCR requirement?

The RBI has stipulated a liquidity buffer in terms of LCR (liquidity coverage ratio), which will promote resilience of HFCs to potential liquidity disruptions. All non-deposit taking HFCs with an asset size of Rs 10,000 crore and above, and all deposit-taking HFCs irrespective of their asset size need to have 50 percent LCR by end of 2021, 60 percent by end of 2022, 70 percent by 2023, 85 percent by 2024 and 100 percent LCR by December 1, 2025.

Can an HFC take exposure to group companies?

Yes. But such exposure by way of lending and investing, directly or indirectly, cannot be more than 15 percent of owned fund for a single entity in the group and 25 percent of owned fund for all such group entities. “The HFC would in all such cases follow arm’s length principles in letter and spirit,” the RBI said.

Importantly, can HFCs accept public deposits?

An HFC can accept or renew public deposit only if it has obtained a minimum investment grade rating for fixed deposits from an approved credit rating agency at least once a year.

"No HFC shall invite or accept or renew public deposit at a rate of interest exceeding twelve and a half per cent per annum or as revised by the Reserve Bank," the RBI said. The RBI asked HFCs to ensure that at all times, there is full cover available for public deposits accepted by them.

In case an HFC fails to repay any public deposit or part thereof as per the terms, it shall not grant any loan or other credit facility or make any investment or create any other asset as long as the default exists, as per the directions.

What is the minimum capital ratio prescribed for HFCs?

Every HFC will have to maintain a minimum capital ratio on an ongoing basis consisting of Tier-I and Tier-II capital which shall not be less than 13 percent as on March 31, 2020, 14 percent on or before March 31, 2021, and 15 percent on or before March 31, 2022, the RBI said.  The Tier-I capital, at any point of time, shall not be less than 10 percent. The total of Tier-II capital, at any point of time, shall not exceed 100 percent of Tier-I capital, the RBI said.

What is a Loan-to-Value (LTV) ratio an HFC needs to comply with?

LTV ratio is the ratio that specifies how much amount a lender can put in against the down payment by the borrower. As per RBI rules, no HFC can lend at more than 75 percent of the LTV ratio for loans above Rs 75 lakhs and at 80 percent for loans between Rs 30 lakh and Rs 75 lakh. Further, an HFC cannot lend against its own shares.