Explainer: What the revised rules for housing finance companies mean

The Reserve Bank of India (RBI) on October 22 issued a revised regulatory framework for housing finance companies (HFCs) based on the feedback it received from stakeholders. This is part of the process of transferring the regulations of these companies from the National Housing Bank to the central bank.

In June, the RBI had placed a draft of the proposed rule changes for HFCs on its website for comments. The final guidelines have been issued after receiving the comments. In August 2019, the central bank first said about the plan to bring HFCs under its regulation as a category of non-banking finance companies (NBFCs).

What is an HFC?

According to the RBI, an HFC is an NBFC whose financial assets constitute at least 60 percent of its total assets. Out of the total assets, not less than 50 percent should be by way of housing financing for individuals.

HFCs, which currently do not fulfil this criteria, need to meet the 60 percent cut-off by March 2024. Of this, 50 percent should be towards housing finance for individuals.

Such HFCs need to submit to the RBI a board-approved plan within three months including a roadmap to fulfil the above-mentioned criteria and timeline for transition.

What happens if this criteria is not met?

Those HFCs unable to fulfil 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 central bank for conversion of their Certificate of Registration from HFC to NBFC-ICC, the RBI said.

How much capital is required?

An HFC needs a minimum Rs20 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 the HFCs fail to comply with this norm within a specified period, their registration will get 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 LCR requirement?

Further, the RBI has stipulated a liquidity buffer in terms of LCR (liquidity coverage ratio), which will promote resilience of HFCs to potential liquidity disruptions, the RBI said. According to this, all HFCs need to have 100 percent LCR by December 1, 2025.

Can an HFC take exposure to group companies?

Yes. But in case HFC prefers to undertake exposure in group companies, 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.

What is the idea of bringing in these rules?

So far, HFCs have been regulated by NHB. The RBI wants to bring these companies under closer scrutiny to make sure these are run with enough safeguards.