Post the transfer of regulation of housing finance companies (“HFCs”) from the National Housing Bank (“NHB”) to the Reserve Bank of India (“RBI”), on June 17, 2020, RBI had formulated a draft framework for HFCs and had sought public comments on the same. HFCs are accordingly now treated as one of the categories of non-banking financial companies (“NBFCs”) for regulatory purposes.

Based on the comments received from stakeholders, on October 22, 2020, RBI issued the revised regulatory framework for HFCs (“Framework”).

The Framework deals with the following:

1. Principal business and housing finance

i. An HFC is required to fulfil the following conditions:

a) its financial assets, in the business of providing housing finance, should constitute at least 60% (sixty percent) of its total assets (netted off by intangible assets);

b) out of the total assets (netted off by intangible assets), not less than 50% (fifty percent) should be by way of housing finance for individuals as stated in para 2(a) to 2(e) below.

ii. “Housing Finance” has been defined to mean financing for purchase/ construction/ reconstruction/ renovation/ repairs of residential dwelling units, which include:

a) Loans to individuals or group of individuals including co-operative societies for construction/ purchase of new dwelling units.

b) Loans to individuals or group of individuals for purchase of old dwelling units.

c) Loans to individuals or group of individuals for purchasing old/ new dwelling units by mortgaging existing dwelling units.

d) 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.

e) Loans to individuals or group of individuals for renovation/ reconstruction of existing dwelling units.

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

g) Loans to corporates/ government agencies for employee housin

h) Loans for construction of educational, health, social, cultural or other institutions/ centres, which are part of housing projects and which are necessary for the development of settlements or townships.

i) Loans for construction meant for improving the conditions in slum areas, for which credit may be extended directly to the slum-dwellers on the guarantee of the Central Government, or indirectly to them through the State Governments.

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

k) Lending to builders for construction of residential dwelling units.

It may be noted that integrated housing projects comprising of some commercial spaces (e.g. shopping complex, school, etc.) may be treated as residential housing, provided that the commercial area in the residential housing project does not exceed 10% (ten percent) of the total FSI of the project.

iii. The abovementioned conditions/ criteria with respect to HFCs and ‘Housing Finance’ will be applicable from the date of the Framework. HFCs who do not currently fulfil the abovementioned criteria, but wish to continue as HFCs, are required to transition as per the following timeline:

Further, such HFCs will be required to submit to the RBI, a board approved plan within 3 (three) months, including a roadmap to fulfil the abovementioned criteria and timeline for transition. HFCs which are unable to do so will be treated as NBFC-Investment and Credit Companies (“NBFC-ICC”) and will be required to approach RBI for conversion of their certificate of registration from HFC to NBFC-ICC.

2. Net owned fund (“NOF”) requirement

The RBI has specified an amount of INR 20,00,00,000 (Rupees twenty crore) as the minimum NOF required for a company to commence or carry on housing finance as its principal business.

However, a registered HFC having a NOF of less than INR 20,00,00,000 (Rupees twenty crore) may continue to carry on the business of housing finance, provided that it achieves a NOF of INR 15,00,00,000 (Rupees fifteen crore) by March 31, 2022 and INR 20,00,00,000 (Rupees twenty crore) by March 31, 2023. Further, such HFCs will have to submit a statutory auditor’s certificate to the RBI within a period of 1 (one) month evidencing compliance with the prescribed levels at the end of the period indicated above. HFCs failing to achieve the same shall not be eligible to hold the certificate of registration as HFCs.

3. Applicability of the directions issued by the RBI

i. The Master Direction on ‘Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016’, as amended from time to time, will apply mutatis mutandis to all HFCs.

ii. The Master Direction on ‘Information Technology Framework for the NBFC Sector, 2017’, as amended from time to time, will apply mutatis mutandis to all HFCs.

iii. The definition of ‘public deposits’ under the Master Direction on ‘NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016’, as amended from time to time, shall apply mutatis mutandis to all HFCs. In addition to the exclusions mentioned therein, any amount received from NHB or any public housing agency will also be exempted from the definition of ‘public deposits’.

iv. HFCs are required to maintain a prudential floor in respect of impairment allowances and follow instructions on regulatory capital as mentioned in the RBI notifications, dated March 13, 2020 and July 24, 2020, on ‘Implementation of Indian Accounting Standards’.

v. Various provisions of the Master Direction on ‘NBFC – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016’ have been made applicable to HFCs, including the following:

a) HFCs lending against listed shares are required to maintain a loan to value (“LTV”) ratio of 50% (fifty percent). Any shortfall in the same occurring on account of movement in the share prices should be made good within 7 (seven) working days. Further, for loans granted against the collateral of gold jewellery, HFCs are required to maintain an LTV ratio not exceeding 75% (seventy five percent) and to put in place a board approved policy for lending against gold.

b) HFCs cannot impose foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligor(s).

c) HFCs can carry out securitisation of standard assets and transfer of assets through direct assignment of cash flows and the underlying securities, in compliance with the guidelines issued by RBI on securitization and assignment transactions, including the minimum holding period and minimum retention requirement standards.

d) HFCs are required to ensure sound and responsive risk management practices for effective oversight, due diligence and management risks arising from outsourcing of financial activities.

e) All non-deposit taking HFCs with an asset size of INR 100,00,00,000 (Indian Rupees one hundred crore) and above and all deposit taking HFCs (irrespective of their asset size) are required to pursue liquidity risk management, which should cover, inter alia, adherence to gap limits, making use of liquidity risk monitoring tools and adoption of stock approach to liquidity risk.

f) HFCs are required to maintain a liquidity buffer in terms of the liquidity coverage ratio (“LCR”) so as to promote resilience and survive any acute liquidity stress. Guidelines on LCR will be applicable to HFCs as per the following timelines:

i. All non-deposit taking HFCs with an asset size of INR 10000,00,00,000 (Rupees ten thousand crore) and above and all deposit taking HFCs irrespective of their asset size are required to maintain a minimum LCR as follows:

ii. All non-deposit taking HFCs with an asset size of INR 5000,00,00,000 (Rupees five thousand crore) and above but less than of INR 10000,00,00,000 (Rupees ten thousand crore) are required to maintain a minimum LCR as follows:

4. Exposure of HFCs to group companies engaged in the real estate business:

In case of group companies engaged in real estate business, HFCs may undertake exposure either to the group company engaged in real estate business or lend to retail individual home buyers in the projects of such group companies. If HFCs prefer to undertake exposure in group companies, such exposure by way of lending and investing, directly or indirectly, should not be more than 15% (fifteen percent) of owned fund for a single entity in the group and 25% (twenty five percent) of owned fund for all such group entities.

In addition to the above, HFCs are required to continue compliance with all extant instructions issued by NHB in respect of other matters.

Further, in respect of maintenance of percentage of assets and reserve fund, the relevant provisions of the National Housing Bank Act, 1987 and not the Reserve Bank of India Act, 1934 shall continue to apply to HFCs.

RBI has also stated that further harmonisation between the regulations for HFCs and NBFCs will be taken up in a phased manner in the next 2 (two) years and a Master Direction for HFCs will also be issued soon.

Please find a copy of the Framework here.

This update has been contributed by Aastha (Partner) and Radhika Kothari (Associate).