RBI'S PROPOSED CHANGES TO REGULATORY FRAMEWORK APPLICABLE TO 'HOUSING FINANCE COMPANIES' HFCS
BANKING FINANCE|November 2021
The Central Government had, with effect from 9th August 2019, transferred regulatory powers of the Housing Finance Companies (HFCs) from the National Housing Bank (NHB) to the Reserve Bank of India (RBI).
Sailesh Kumar

Subsequently Reserve Bank of India has now placed a draft of the changes proposed in the regulations applicable to HFCs. "RBI has undertaken the said review and has identified a few changes which are proposed to be prescribed for HFCs," the central bank said on June 18, 2020.

A review of the extant directions/ guidelines applicable to HFCs has been carried out with a view to regulating HFCs as a category of Non-Banking Financial Company (NBFC). Accordingly, in areas where the extant regulation of HFCs are in tandem with that of NBFCs, the relevant paras in the NBFC Master Directions would be made applicable mutatis mutandis to HFCs. In areas where extant HFC regulation differs from that of NBFCs, either existing provisions would be retained, or changes would be brought out wherever possible while ensuring that the changes are made in a least disruptive manner.

Given below are the major changes envisaged in the regulatory framework for HFCs:

1. Applicable law for the regulation of HFCs:

Companies intending to function as HFCs shall seek registration with the Reserve Bank under Section 29A of NHB Act, 1987 and existing HFCs holding Certificate of Registration issued by NHB need not approach RBI for fresh CoR.

2. Defining the term 'Providing Finance for Housing' or 'Housing Finance'

It is observed that the term 'providing finance for housing' or 'housing finance' is not formally defined. However, in general parlance, it can be treated as providing finance for residential housing purposes and should ideally not include finance for non-residential purposes like commercial real estate, etc. for this purpose, the meaning of the term housing finance as indicated for various purposes in circulars issued by RBI, NHB and also under the Income Tax Act 1961 was examined. It is proposed to have an inclusive definition of the terms 'providing finance for housing' or 'housing finance' as per provisions of RBI's master circular on housing finance addressed to banks and NHB's illustrative list of housing loans. 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 for purchase of old dwelling units.

b) Loans to individuals for purchasing old/ new dwelling units by mortgaging existing dwelling units.

c) 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.

d) Loans to individuals for renovation/ reconstruction of existing dwelling units.

e) Lending to public agencies including state housing boards for construction of residential dwelling units.

f) Loans to corporate/ Government agencies (through loans for employee housing).

g) Loans for construction of educational, health, social, cultural or other institutions/ centre, which are part of housing project in the same complex and which are necessary for the development of settlements or townships.

h) 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.

i) Loans given for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies.

j) 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 buying/ construction of a new dwelling unit/s or renovation of the existing dwelling unit/s, will be treated as non-housing loans.

3. HFC is required to have a 'Principal Business' of providing housing finance.

Term 'Principal Business' is not defined under the NHB Act. RBI now proposes to define and extend the definition of 'Principal Business' similar to that used for Non-Banking Financial Companies (NBFCs).

The RBI has defined the term through its press release dated April 08, 1999 saying that a company:

a) Required to have financial assets more than 50% of its total assets (netted off by intangible assets); and

b) Its income from such financial assets should be more than 50% of the gross income. It is imperative that both the above mentioned conditions are satisfied in order to determine the constituents of 'Principal Business'

4. Along with the "Principal Business" as defined above, it is also required to have "Qualifying Assets"

'Qualifying Assets' refers to 'housing finance' or 'providing finance for housing' and will be subject to the following:

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