RBI introduces brand new rules for housing finance enterprises

RBI has put forward that HFCs should not be concurrently permitted to lend to a real estate developer and along with homebuyers in the same developer’s project. Upon getting a review of the regulations, HFCs will be governed as a category of NBFCs. 


On Wednesday, The Reserve Bank of India (RBI) proposed to stiffen the rules governing home financiers, which also includes formulating limitations on lending to developers and doubling the least net owned capital criterion.


The regulator’s proposal has also clearly defined home finance firms and particularly those that are systemically essential. RBI has even proposed that home financiers should not be allowed to lend to a real estate developer as well as homebuyers engaged in the same builder’s project at the same time.


These suggested changes in the rules have come as RBI’s is picking up as the supervisor of the mortgage financiers from the National Housing Bank (NHB) in August 2019. As the rules are being reviewed, the home financiers will now be regulated as a class of non-banking financial firms.


As per the NHB regulations, there was no official description of housing finance. In the draft structure published on their website, RBI mentioned that housing finance will specifically mean “financing, for purchase/construction/reconstruction/ renovation/ repairs of residential dwelling unit…” along with several other activities which will include offering loans to corporates and government agencies for employee housing schemes.


RBI also declared that, “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,”


In accordance with the draft regulations, RBI also categorized housing finance firms as systemically important and non-systemically important. “Non-deposit taking HFCs with asset size of ₹500 crore and above, and all deposit-taking HFCs irrespective of asset size will be treated as systemically important HFCs. HFCs with asset size below ₹500 crore will be treated as non-systemically important HFCs,” as claimed by the proposed regulations.


Srinath Sridharan, a banking sector expert said, “RBI’s announcements on draft regulatory changes for HFCs sharpen the definition of what’s ‘housing finance’ or ‘providing finance for housing’ to residential dwellings. It also provides relief to residential developers as lending to builders for construction of residential dwelling units is allowed in this definition,” He also added, “Also, with a few other tightening of regulations, I anticipate the valuation-driven hunger for HFC licences over the past few years will ebb. Only serious players will stay in this industry.”


RBI has also indicated that in order to be eligible as a housing finance company, a minimum of 50% of net assets should be to real estate lending, of which at least 75%, in particular, should be towards personal housing loans. Those HFCs that do not meet the eligibility will be addressed as NBFC–investment and credit companies (NBFC-ICCs) and they will need to propose to RBI for an alteration of their certificate of registration from HFCs to NBFC-ICC.


RBI has suggested doubling the minimal net owned funds for HFCs to ₹20 crores and harmonize the fund requirements of all HFCs with NBFCs across a period of two years. For HFCs, the minimum capital risk-weighted assets ratio (CRAR) is presently at 12%, which will be raised to 14% by 31 March 2021 and 15% by 31 March 2022.

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