RBI proposes a few changes for regulatory framework applicable to HFCs

Reserve Bank of India today placed a draft of the changes proposed to be prescribed for HFCs. These are as follows:

1. Classifying HFCs as systemically important (asset size of ₹500 crore & above) and non-systemically important (asset size less than ₹500 crore);
2. Reserve Bank’s directions on Liquidity Risk framework &, LCR, securitisation, etc., for NBFCs, to be made applicable to HFCs
3. Double the minimum net owned funds requirement for housing finance companies (HFCs) to ₹20 crore
4. Not less than 50 per cent of net assets are in the nature of ‘qualifying assets’ for HFCs
5. The qualifying assets include loans to individuals or group of individuals including co-operative societies for construction/purchase of new dwelling units; loans to individuals for purchase of old dwelling units; and lending to builders for construction of residential dwelling units. Out of which at least 75 per cent should be towards individual housing loans in phased manner. [60% by March 31, 2022, 70% by March 31, 2023 and 75% by March 31, 2024.
6. HFCs which do not currently fulfill the qualifying assets criteria, and not able to achieve the above prescribe target will be treated as NBFC – Investment and Credit Companies (NBFC-ICCs) and will be required to approach RBI for conversion of their Certificate of Registration from HFCs to NBFC-ICC. Application for such conversion should be submitted with all supporting documents meant for new registration together with an auditor’s certificate on Principal Business Criteria (PBC) and necessary board resolution ratifying the conversion.
7. In order to circumvent double financing due to lending to construction companies in the group and also to individuals purchasing flats from the latter, the HFC concerned may choose to lend only at one level. That is, the HFC can either undertake an exposure on the group company in real estate business or lend to retail individual home buyers in the projects of group entities, but not do both.
8. If the HFC decides to take any exposure in its group entities (lending and investment) directly or indirectly, such exposure cannot be more than 15 per cent of owned fund for a single entity in the group and 25 per cent of owned fund for all such group entities.
9. As regards to extending loans to individuals, who choose to buy housing units from entities in the group, the HFC would follow arm’s length principles in letter and spirit.

 Up till now, HFCs have been complying with the directions and instructions issued by NHB.  The first time after the transfer of regulation of HFCs from the National Housing Bank (NHB) to Reserve Bank with effect from August 09, 2019, decided to review the extant regulatory framework applicable to HFCs and come out with revised draft regulations.