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At the outset, we thank the Reserve Bank of India (RBI) for giving opportunity to the stake holders to offer comments on the changes proposed to the regulations applicable to HFCs. Before we proceed with our comments, we would like to mention that Pioneer Housing Finance Academy is established by Om Vitta Evam Avasik Gyan Vikas Samiti, a society registered under the Societies Registration Act, 1860. The Academy is engaged in training, research and development activities for the last three years and has conducted number of training programs for officials of housing finance companies and published number of articles on its website: housingfinanceacademy.com. The area of training includes regulation and supervision of HFCs to ensure that HFCs understand and remained compliant with the applicable regulations. Therefore, emerging regulations for the housing finance companies is an area of great interest to the Academy. The Academy would, therefore, like to offer its views on the proposed changes and hope that the same will be considered before issue of the final guidelines by RBI.Our feedback on the proposed changes is as follows: Preliminary : Duality of Regulation
(i) The Academy welcomes the decision to integrate the regulatory function which was hitherto exercised by the National Housing Bank with the Reserve Bank of India. However, a careful perusal of the Finance (No.2) Act, 2019, which, inter alia, amended the National Housing Bank Act, 1987 suggests that even after such an amendment RBI has been conferred the power to regulate HFCs through the National Housing Bank Act.
In so far as RBI power to regulate HFCs is concerned, being a species of Non-banking Finance companies, RBI always has the power to regulate them under the RBI Act. Conferment of such powers on NHB by the NHB Act, 1987, created a situation of dual regulation of HFCs. It is in these circumstances, that RBI exempted HFCs from the applicability of provisions of Chapter IIIB of the RBI Act vides its notification dated June 18, 1997. The Academy feels that withdrawal of such exemption has again restored the position of dual regulation existing before such notification, more particularly in view of provision of section 36 of the NHB Act, which gives overriding powers to Chapter V of the said Act.
The Academy is of the view that the position needs to be examined thoroughly from the legal perspective. The Academy suggests that either RBI should exercise all the powers in relation to HFCs under the NHB Act, being the authority entrusted with such power by the Parliament under the said Act or if for any reason, it is convenient or more appropriate for RBI to exercise such powers under the RBI Act, then it should first exempt HFCs from the provisions of Chapter V of the NHB Act by exercising its power under the NHB Act (Section 35B) so as to give effect to the will of the legislature and then regulate them under Chapter IIIB of the RBI Act. This will help the regulated HFCs to know about the provisions of the Act under which any regulation /direction/ instruction/guideline is being issued by the Regulator and the consequences (penalties) they have to suffer in case of any violation or breach by them. It may be mentioned that penalty provisions under the two enactments differ after the amendment of RBI Act also by the Finance (No.2) Act, 2019.
(ii) HFCs, as a class, have become used to separate set of regulation under the regulation and supervision of NHB since 1989. Some of these regulations are akin to NBFCs, whereas in some areas because of their nature of activity, they differ. The Academy is of the view that special character of these HFCs (NBFCs) should always be kept in view while aligning them with the regulations applicable to NBFCs in future. The Academy also suggest that RBI should issue separate series of Master circulars for HFCs (which may even include common regulations) to help them better understand and observe regulatory provisions applicable to them under the new dispensation.
The Academy suggest that our endeavour should be to have the term “providing finance for housing or housing finance” defined statutorily which should be uniform across various statues. It may be mentioned that a Bill was introduced in Lok Sabha ( Bill No. 51 of 2012) to amend the National Housing Bank Act, 1987, which contained the following Explanation, namely :-
“Explanation:- For the purposes of this clause, the expression “housing activities” includes acquisition, construction, reconstruction, purchase, repair or renewal of a residential house and all off site and on site housing related activities or activities incidental thereto”. However, the Bill lapsed due to dissolution of the Lok Sabha and has not been not introduced subsequently.
In the absence of statutory definition of the term “providing finance for housing or housing finance” the meaning ascribed to them in common parlance shall apply. However, an illustrative list from the Regulator will help the regulated entities in proper classification of loans and consequently in application of other regulatory norms. The Academy, therefore, welcome the decision to notify an exhaustive list of activities to be considered housing finance activity. The Academy suggests that the following should also be considered for inclusion in the said list:
- a) Loans to Hindu Undivided families for acquisition, construction, reconstruction, purchase, repair or renewal of a residential house. HUF are entitled to income tax concession under the Income tax Act.
- b) Loans to employers (which include all forms of organizations viz., sole proprietorship, partnership, LLP, companies, societies etc.) for employee housing.
- c) Loan for repayment of existing housing loan.
- d) Acquisition/purchase of housing loan by one regulated entity from another regulated entity.
- e) Loans to or Subscriptions to bonds and debentures issued by NHB/HUDCO/ other regulated housing finance companies.
The Academy has considered section 29A(1) of the NHB Act, as amended which has used the words “shall commence housing finance as its principal business or carry on the business of housing finance as its principal business” instead of the words “ shall commence or carry on the business of a housing finance institution”. There is no change in the definition of the expression ‘housing finance institution’ which as defined includes every institution, whether incorporated or not, which primarily transacts or has as one of its principal objects, the transaction of the business of providing finance for housing , whether directly or indirectly.
From the reading of the above provisions, it appears that for registering a company as a housing finance company one need to commence housing finance as its principal business and if it is already into the housing finance business, it need to show that it shall carry on housing finance as its principal business. Having an object to conduct housing finance business in its memorandum henceforth will not be considered sufficient for grant of certificate of Registration as a housing finance company.
After going through various judicial pronouncements on the subject, the Academy is of the view that the expression ‘primarily’ or ‘principally’ or ‘chiefly’ or ‘mainly’ etc. have one and the same meaning and is not to be confused with the word ‘wholly’. It essentially denotes majority of business. Viewed in this context, the Academy welcomes the extension of the twin criteria applied to NBFCs in this regard i.e. a company will be treated as an HFC if its financial assets are more than 50% of its total assets (netted off by intangible asset) and income from financial assets is more than 50% of the gross income.
However, the proposal to introduce the concept of ‘qualifying assets’ for HFCs as done in the case of NBFC-MFIs needs re-consideration. It is for the reason that a company is required to be registered as a housing finance company under the statue if it shall commence housing finance as its principal business or carry on the business of housing finance as its principal business. The emphasis is on housing finance as defined or illustrated above and not to whom it is provided i.e. Individuals, housing boards, slum authorities, corporate etc. Once a company is registered as a housing finance company, it has to be regulated as such as a housing finance company.
Even otherwise considering a housing finance company as NBFC- Investment and Credit Companies for the reason that they have less than 75% lending towards individual housing loans will have implications for them under various other statutes viz., Income-tax Act, Acts governing development authorities which have in built provision for mortgages by the buyer in favour of HFCs etc.
The Academy, however, supports the view that the lending by HFCs should be predominantly to individuals. Therefore, to avoid the regulation from being questioned from the legal point of view, the Academy suggest that while such companies( companies having housing finance less than 75 % to individuals) can be registered as a housing finance company, RBI can prescribe different set of regulations where its lending to individual is less than 75% of its total lending. Such regulation can be akin to the regulations applicable to NBFC- Investment and Credit Companies with such changes as are deemed necessary.
The Academy welcomes the proposal to classify HFCs into systemically important and non-systemically important entities for regulatory purposes.
The Academy, however, would like to emphasise that HFCs cater to a basic human need i.e. shelter. They have been consciously promoted over the last 30 years after the establishment of NHB and in many respects differ from NBFCs. For instance, their loan size is generally more than a normal NBFC, the tenure of loan is longer and the loans are better secured with the mortgage of the property. NPAs are also less than other NBFCs. Furthermore, considering the huge requirement of housing in the country and the low level of mortgage penetration, there is need to continuously support and promote HFCs in the country. They are the dedicated outlets for housing finance.
The Academy, therefore, suggest that criteria for the asset size should be Rs. 1000 crore instead of Rs. 500 crore for classification of a HFC as systemically important. This will help RBI to closely regulate and monitor large sized HFCs and deposit taking HFCs which occupies over 90% lending by HFCs in the country. Small HFCs will be able to conduct their business with less rigour of regulatory provisions.
The Academy welcomes the proposal to increase the minimum NOF requirement from the existing Rs. 10 crore to Rs. 20 crore for registration of new companies and a glided path of two years for achievement of the increased NOF requirement by smaller companies.
However, the Academy would like to mention that distribution of HFCs and their lending is not uniform across the country. The States of Maharashtra, Gujarat Karnataka, Tamil Nadu, Rajasthan and NCT of Delhi accounts for almost all the companies in the country in the matter of registration . Similarly, most of the lending by these companies has been done in these states. For the development of housing finance in whole of the country, it is necessary that establishment of HFCs in other states and in the North Eastern region of the country is encouraged by continuing with requirement of lower limit of NOF. The Academy, therefore, suggest continuation of the existing NOF requirement for establishment and carrying on the business in other states by HFCs provided 50% of their lending is done by them in the state of their registration.
The Academy welcomes the proposal to align the definition of capital (both Tier I and Tier II) of HFCs with that of NBFCs.
The proposal would impact HFC–D and non-systemically important HFCs as they would not be eligible to issue PDI even for Tier II capital. The impact of the proposal on the existing such companies need to be examined before implementing the proposal.
As regards the proposal to reduce investment in shares of other NBFCs from the Tier I capital to the extent it exceeds, in aggregate along with other exposures to group companies, ten per cent of owned fund of HFC, we suggest that the same should be achieved only by amendment to the NHB Act and not by means of a regulation to avoid any legal challenge to the same lateron.
The Academy supports the proposal to align the definition of public deposits as given under RBI master direction with an addition that any amount received by HFCs from NHB or any public housing agency is also exempt from the definition of public deposit.2.8 Liquidity Risk framework and LCR
The proposal would help better management of liquidity risk concern in the HFCs. The Academy, therefore, support the extension of the framework to HFCs with asset size of Rs. 100 crore & above and recommend adoption of the same by other HFCs.2.9 Group entities engaged in real estate business.
The Academy appreciates the concern of double financing flagged in the proposal. However, there should be no objection to the financing of individual units provided the security interest in the said unit is first released by the HFCs in favour of group entitiy to enable it pass on an unencumbered title to the buyer, which can be taken again by HFCs as security for its loan for the individual unit.
As regards limit on lending and investment in group entities in real estate business, the Academy is of the view that the same need to be examined thoroughly after obtaining views of the stake holders on the same as the proposal should not impact the growth of the sector.
The present instructions issued by NHB are in tandem with the one issued by RBI.2.11. Information Technology Framework
The present instructions issued by NHB are in tandem with the one issued by RBI.2.12. Securitization
NHB has not issued any guideline in the matter of securitisation/assignment by HFCs. Even now the HFCs a measure of prudent caution follow the RBI guidelines. Therefore, formal extension of such guidelines to HFCs will be a welcome step as this will remove the ambiguity about their application to HFCs.2.13. Lending against shares
As mentioned in the proposal, presently there are no guidelines in this regard issued by NHB primarily for the reason that HFCs are not in the business of lending against the collaterals of shares. The extension of the existing guidelines applicable to NBFC in this regard will not significantly impact the lending behaviour of HFCs. However, it may give them an additional avenue to secure their lending or to lend for houses where HFCs are not sure of the title to the property. The Academy, therefore, supports the said proposal.2.14. Managing Risks and Code of Conduct in Outsourcing of Financial Services
No guidelines have been prescribed by NHB. Therefore, extension of guidelines to HFCs is this regard is a welcome step.2.15. Foreclosure charges
NHB has, from time to time, issued instructions to HFCs in the matter of prepayment penalties. Attention in this regard is invited to Circular No. 36 dated 18.10.2010, No. 43 dated 19.10.2011, No. 48 dated 04.04.2012, No. 17 dated 22.07.2016, No. 63 dated 14.08.2014, No. 66 dated 03.09.2014 etc.
The Academy, therefore, welcomes the extension of the current circular applicable to NBFCs to HFCs, which specially mention that the loan should not be for business purpose and is availed by individuals with orwithout co-obligants. .
It is, however, for consideration, whether the existing circular issued by NHB which provides for exemption from payment of foreclosure charges even on fixed rate housing loans, if pre-paid from own sources should continue as this is a customer protection measure. The Academy also feel that such benefit should also extend to loans availed by HUFs.
The Academy support uniformity in the matter of implementation of accounting standards across various lenders.3. Other Differences in the regulations applicable to NBFCs and HFCs.
The Academy would like to offer its views as when proposal for such changes are made and opportunity is given to the stakeholders.
The Academy once again take this opportunity to thank RBI for the opportunity to express its view on the proposals and hope that the same will be taken into account while giving effect to the same.