On Wednesday, the Reserve Bank of India has put forward tougher rules for housing finance companies (HFC). Including lending and investment curbs in group entities to prevent conflict of interest, while changing the definition of ‘housing finance’ and setting thresholds to identify the bigger players that are systematically important to the mortgage industry.
To be empowered as a housing finance company, 50% assets as housing loans and 75% of which should be for individual homebuyers are HFCs, as defined by the regulator. The proposed norms come months after the blowout at Dewan Housing Finance (DHFL), where a few retail loans were found to have been diverted to group companies.
There was no formal definition of housing finance under the NHB regulations. Within the draft framework released on its website, RBI said housing finance will now mean ‘financing, for purchase/construction/reconstruction/ renovation/ repairs of residential dwelling unit ‘ and a few other activities, which include providing loans to corporates and government agencies for employee housing projects. The revisions propose HFCs can either take exposure to the group company within the business of assets or lend to personal, retail homebuyers in group entity projects to address double lending.
HFCs exposures, whether in terms of lending and investment cannot exceed 15 percent of the owned funds during a single entity within the group and 25 percent of owned funds for all such group entities.
For loans to individual buyers who prefer to buy housing units from entities within the group, the HFC would follow the arm’s length principles in letter and spirit. For the construction of residential dwelling units, schools, and hospitals within its range while excluding loans against the property from it brings loans to builders as change within the definition of housing finance.
Reserve Bank India also put forward a rise in the minimum net owned funds (NOF) for HFCs to Rs 20 crore from Rs 10 crore. The approach would be to achieve Rs 15 crore within one year and Rs 20 crore within two years for existing HFCs. Those who are on the border will be given time. And although they are not capable to boost up to twenty crores within the stipulated time, RBI will provide dispensation to them.